Can I move my money to Reykjavik?

November 6, 2007 8:29 PM

I read in the Wall Street Journal this weekend that Iceland's Central Bank raised interest rates...to 13.75 percent! Can I move my money to Reykjavik?

I've seen high rates from countries with unstable economies before, but I don't think Iceland is going anywhere. They have moderate inflation (~ 3.5% IIRC) and I'd doubt the US dollar is going to make a comeback real soon. Even after currency conversion fees, I still ought to handily beat online savings account yields.

So is there any reason I can't move my US dollars to an Icelandic bank and enjoy a 13.75% interest rate? Maybe laws, taxes or other factors that make this infeasible?

posted by tomwheeler to work & money (9 comments total)

Talk to these guys. They have offices in the U.S.
posted by Cool Papa Bell at 8:41 PM on November 6, 2007

You might want to check out Everbank for something like that. As I posted this, the 3 month CD is returning something close to 13%. I would highly recommend that you do your own due dilligence, though, as the Krona can be somewhat volitaile, and you can lose principal through something like this.
posted by richter_x at 8:44 PM on November 6, 2007

Well, you need to assume that any simple arbitrage has been discounted out of the current prices.

Without getting into the fundamentals of the Icelandic economy, the krona has historically been a pretty volatile currency and is not tied to the Euro. So the 13.75% interest rate reflects a high degree of uncertainty about where exactly it's headed relative to both the dollar and the Euro.

It's not infeasible at all... it's just a high degree of risk. You can move your money into the currency, earn your 13.75%... but who knows where the currency will be when you want to get it out?
posted by unSane at 8:47 PM on November 6, 2007

It can be done, but just remember, there's no such thing as a free lunch. If you could easily and safely make 13% in Iceland, everybody would be doing it; as unSane points out, that interest rate is a sign of perceived risk.

I'd take a very, very good look at the USD versus the ISK (I just did and it looks like the ISK has been slipping versus the dollar, which is impressive considering the dollar has been falling like a rock). Looking at it versus the Euro makes it pretty plain what kind of instability is concerning the bankers.

Basically, you'd be betting that the USD continues to slide just as or almost as quickly as the ISK during the time you have your money invested. If the ISK declines faster, or if the dollar recovers, you may lose the spread.

180-day ISK versus USD
180-day ISK versus EUR
posted by Kadin2048 at 9:27 PM on November 6, 2007

Over the last year the krona has varied between 73 and 58 to the dollar.

Say you buy $1000 at 58 and make 13% over three months, giving you ISK 58,000 x 1.13 = ISK 65,540. But in the interval the krona has declined to 66 on the dollar (it takes more krona to buy a dollar). You exchange your "winnings" and find that you have $999. Some investment! Worse, say it hits the peak of 73, and you get back less than $900. That's with interest, and omitting any fees.

In any case you can see that less dramatic fluctuations can severely cut into your interest gains if not wipe them out altogether. This is something that the big boys play at and often lose.

If you can stand the risk, by all means consider this. I doubt the Icelanders will mind the increased liquidity. But you'd better have the mentality of a gambler, and limit what you play with.

I found this article about a year in which Arla -- a Swedish food conglomerate -- experienced increased productivity and sales, but in an unfavorable exchange rate environment -- the more money they made, the less it was worth. The CEO described it as "a very special experience." I can only imagine it was.
posted by dhartung at 9:30 PM on November 6, 2007

ISK/JPY has been a popular spin on the yen carry trade for a couple of years now, and the ISK's now the strongest it's been since 1993 (it's quoted USD/ISK, so low numbers = stronger ISK).

The problem is that the Icelandic economy is insanely overheated. Inflation is running at 7% or so, and the current account deficit is a massive 17% of GDP. To put that in perspective, New Zealand is regularly condemned for its massive current account deficits, but theirs is only about 8% of GDP if memory serves.

So the yield is great, but you could be staring at a 1994-Mexican-peso-style devaluation if you're unlucky.

(Also, as people have mentioned, the ISK is volatile, and illiquid as hell. If anything, it trades like a stock rather than a currency, pausing overnight and then gapping every morning when Europe walks in.)
posted by The Shiny Thing at 9:44 PM on November 6, 2007

in dhartung's example, when you consider that the 13% is actually an annual interest rate (not what is paid after 3 months) then even worse
posted by 5bux at 12:00 AM on November 7, 2007

Many great answers here -- thanks everyone.
posted by tomwheeler at 5:44 AM on November 7, 2007

Well, with all the trouble in Iceland these days I wanted to give an update. After asking this question last year, I studied the fundamentals of their economy and found that they weren't at all strong. And so I am happy to say I did not convert any of my money to ISK and move it to their banks.
posted by tomwheeler at 6:46 AM on October 10, 2008