The IMF will lend Iceland $2.1 billion, and Finland, Sweden, Norway and Denmark will loan $2.5 billion to help the country re-float its currency and shore up its banking sector.

The Icelandic krona, or crown, has lost about 70% of its value since the nation’s financial crisis first began. The government put restrictions on currency trade as it wrestled with the crisis, however one of the stipulations of the IMF loan is that Reykjavik once again float its currency. Once it does, it’s likely that there will be a “massive currency outflow,” Iceland’s central bank said.

The krona, which traded at 176 against the euro at a Nov.19 auction, could trade weaker than 250 per euro after the float, Lars Christensen, chief analyst at Danske Bank A/S, told Bloomberg.
“They’ll have to accept that there’ll be a pretty significant pressure on the currency when they reintroduce a free float,” Christensen said.

The IMF said that $827 million of its loan would be made available immediately and the rest in eight installments of about $155 million, subjected to quarterly reviews.

Iceland will also get about $6.3 billion from the United Kingdom, the Netherlands, and Germany to cover foreign deposits at Icesave – a unit of the failed bank Landsbanki Islands.

“Iceland is in the midst of a banking crisis of extraordinary proportions,” John Lipsky, deputy managing director of the IMF, said in a statement. The country “is facing a severe recession, given the high debt level in the economy and significant dependence of the private sector on foreign currency and inflation-indexed debt.”

The debt burden resulting from IMF, European, and Nordic loans totals nearly $11 billion, greater than the nation’s gross domestic product (GDP). The Icelandic economy is worth roughly $7.5 billion, based on 2007 GDP at current krona exchange rates, Bloomberg reported.

Divided amongst a population of 320,000, each citizen would have to come up with $34,375 to pay off the debt. But that’s only if Icelanders stick around.

Up to a third of Iceland’s population is considering leaving the island, the Financial Times reported. That kind of exodus would result in even less tax revenue and economic development and deepen a recession that is already expected to be severe.

The IMF expects Iceland’s GDP to contract 9.6% next year, while Danske Bank’s Christensen estimates the economy will contract by a full 10%.

Source: Iceland Gets $11 Billion Bailout, but Will be Saddled with Debt for Years to Come

OK… The currencies tried like all get out yesterday to rally VS the dollar, the euro did end the day 1% higher on the day, which after the bloodshed of the past month, I’ll take that any old time! I would love to go back to 2005 (not really, but for this conversation’s sake I will) and pull out some old Pfennigs where I talked about all the naysayers talking about a break up of the euro… We had the NO votes from France and Denmark on accepting the European Union’s (EU) Constitution, we had riots in the streets of France, we had rising interest rates in the U.S. and dozens and dozens of naysayers called out the euro and said it would collapse under the weight. I said then, and I’ll say now… HOGWASH!

Shoot Rudy! If this had all played out like the EU Finance Minister bragged about just two weeks ago, the U.S. economy would be drowning without a life preserver, and Europe would be pointing their finger saying neener, neener, neener… But the Finance Minister misspoke and didn’t get the memo that Europe had toxic waste bonds too! So, the euro which should be basking in the sunlight is being tarred with same brush as was used on the dollar, when the markets thought it was just a “U.S. problem”…

Front and Center this morning, we have news that the U.K. Gov. has unveiled plans to partially nationalize major banks, with taxpayers taking a share stake in a bid to restore stability to the banking industry. Eight banks have signed up for the recapitalization plan, which isn’t a marker on who’s doing bad and who’s doing OK… These banks, Abbey, Barclays, HBOS, HSBC, Lloyds, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered, see a chance to shore up their balance sheets… Who wouldn’t sign up of that these days?

I don’t really know what to make of this plan, I like it because taxpayers get a share of what they paid for… But I don’t like it because once again the Gov. has gotten involved!

Well… The DOW fell another 500 points yesterday… I read something last night that reported U.S. retirement assets are down $2 Trillion dollars in the past 15 months! I guess the markets are calling for “more” from Big Ben Bernanke… The “more” they are asking for now is an interest rate cut, and not some measly 25 BPS… Hey, use the Reserve Bank of Australia (RBA) as your guide… They felt the need to jump start their economy with a rate cut and came out with a 100 BPS cut! No sense in messing around, eh? I mean, if you believe you will need to cut 100 BPS over a period of time, why not go for the gusto and get it over with?

That’s how I’ve always worked on things… If I had things to do at work or home, don’t stop until it’s done, and then take a break…

So, anyway, back at the ranch… Big Ben is getting pelted with requests for rate cuts… I wonder if he has the intestinal fortitude to do a Saturday Night Special? (a rate move, out of meeting, and on a Saturday night, like Paul Volcker did back in the 80’s) If Big Ben’s speech yesterday is any indication of what he might do, then the “fix” is in for a rate cut… You see, he gave a strong indication that interest rates may need to be lowered… He has this to say… “The combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased.”

WOW! He finally sees the downside risks to growth have increased! A round of Applause for the Fed Chairman! Don’t ask me what they heck he’s been looking at if he’s just now come around to seeing downside risks to growth increasing!

Even sadder new than the Fed Chairman just now waking up to smell the coffee, is the unwinding of the Carry Trades for Aussie, kiwi, Brazil, and any other high yielding currency that was purchased in the Carry Trade… Yes, it’s all seashells and balloons for Japanese yen, but the currencies of Australia, New Zealand, Brazil, South Africa and others are getting hammered with the unwind going on. The Aussie and kiwi currencies have fallen to 5-year lows VS the dollar… What took 5-years to build, has been knocked down… I can’t believe it with my own 4 eyes!

The Brazilian real, which had been the belle of the ball for the last two years, has really fallen on a sword… And it all comes back to the unwinding of Carry Trades folks… Should “risk” return to the markets, we could see these trades come back in a hurry… But I wouldn’t hang my hat on the thought that “risk” will return to the markets any time soon… This is the worst period of time in the financial markets that I have even seen… And just so you know… I began my career in the Brokerage business in 1973! So… That covers some time, eh? And I’m not just saying this because these currencies have fallen so badly… This IS the worst period of time that I have seen in the financial markets, period.

Shoot Rudy, the stock market crash of 1987 is like a part compared to this mess!

Stocks are circling the bowl, the high yielders are too, you are lucky if you can get 50 BPS yield on a 3 month T-Bill, and so on… But Gold… Gold is back above $900 this morning, and has rallied 3 days in a row, after dipping to $859 on Monday.

There’s been a lot said recently about Gold and Silver for that matter too, and the theories on why they have not soared to the moon, given the shortage of Gold and Silver… Swiss Asia Capital CEO Jurg Kiener was on CNBC the other day to talk about gold, and he noted the disparity between the explosive physical market price and the sluggish paper market price, blamed the speculation of Wall Street banks for the latter, and predicted the failure of the paper market and the quick doubling of the gold price.

Well… The dollar continued to push the envelope against a handful of currencies yesterday. Up front and center, the high yielders got beaten about the head and shoulders by the dollar. Aussie, kiwi, real, rand, all took major hits from the dollar. It was one of the worst days I can remember seeing for these currencies. This huge sell off showed two things going against the high yielders… 1. Commodities (other than Gold) are getting whacked, and 2. The Carry Trade is Dead…

To add insult to injury, the Reserve Bank of Australia (RBA) surprised the markets with a shock 100 BPS rate cut last night. A short-lived rally in Aussie after the announcement leads me to believe that interest rate expectations are not driving currencies right now. Instead, we’ve got the same kind of strange thinking in the markets, much like in 2001 and 2002, where the markets rewarded currencies that had Central Banks that cut rates to promote growth… It was the first time I had seen currencies gain after being debased, but it was there right before my eyes, and now, this… It could be happening again…

Yesterday, Japanese yen actually traded for a good part of the day with a 100 handle! That was a 3.5% gain in one day VS the dollar! Talk about the Carry Trade being dead… WOW! I looked up from my attempt to work through trading yesterday and saw yen with a 100 handle, and shouted out… “Hey! Look here everyone, yen is 100, I told you all that yen would get to 100!” Then some smart alec yelled back… Yeah, you said that two years ago, now sit down and trade currencies! HAHAHAHAHA! Funny guys…

On the Very Serious side folks, is the news that we came across yesterday when attempting to deal in Icelandic krona… There was no forward market! Dealers would only quote spot transactions! The banking crisis had reached a point that basically shut the markets down. The currency dropped 33%!!!!! This was Serious Stuff folks, I was scrambling around trying to find a forward market so our CD’s could roll to the next maturity… But there was none… Well, maybe one could be found if the buyer wanted to take HUGE LOSSES… One’s that were 1000% away from the previous week’s bad forward points.

Basically, what happened is that, as I reported yesterday morning, the Icelandic Central Bank was waiting to hear from the Nordic Central Banks regarding a bailout, when they had to take the second largest lender, Landesbanki, into receivership… This news spread quickly, and caused the currency to drop to depths not seen in recent years. Since then Iceland has announced that they had received a 4 Billion euro loan from Russia to provide the banking system help and liquidity.

Now… The Central Bank has announced plans to peg the Icelandic krona to the euro at a value of 131. So… Like I said above, there is no forward market, the Icelandic krona CD’s that remain will have to be closed when they come due. And they can NOT be traded / broken ahead of maturity, as there is NO FORWARD MARKET. A sad ending to what was once an exciting currency to be in… But had faded badly since early this year when the banking crisis arrived on the Icelandic scene.

So… There are a lot of theories as to why the dollar continues to rally in the face of increasing debt burdens, job losses, factories nearly shutting down, etc. In the end it really is just a case of the U.S. and Europe being in a bind, and them coming back to dollars as a safe haven… There’s the CDO’s unwinding, there’s the capital requirements on toxic waste bonds, there’s a ton of things going for the dollar right now, and I won’t deny it… Which is why I said yesterday, that I needed to go sit in a corner with my back to the room, for not seeing this ahead of time… I was so myopic about all the bad stuff causing problems for the dollar, and didn’t see the bad stuff causing dollar strength… Just didn’t make sense to me, the dollar looked like it didn’t have a prayer…

OK the focus today, since the data cupboard is basically in need of a trip to the grocery store, will be on speeches… First, European Central Bank (ECB) President, Trichet, will speak at the World Policy Conference in France. That will be followed by Big Ben Bernanke talking at a Capitol Hill boondoggle. Fed Head, Stern, will speak in Chicago on Financial Shock, which should be quite current, eh? I think the thing to think about here is that Trichet, and the hawkish Fed Heads, including Big Ben, remember he said in June that he was an inflation fighter, are all going to have to back off their hawkish statements… This is not the time to be putting the fear of higher interest rates into the markets…

Things like the Wall Street Journal (WSJ) reporting yesterday that Bank of America (BAC) announced a cut in their dividend by 50% and raise $10 billion through the sale of common stock. Tell me that fundamentally the U.S. economic position is teetering… So, will the dollar’s run be short-lived? Well… As far back as July I was telling anyone that would listen to me that I thought the dollar strength would last through the elections and probably through year-end. So… That’s my story and I’m sticking to it.

We will see the color of the Fed’s FOMC meeting minutes from last month’s meeting… One would think that it would be, if they were honest with themselves, a picture of an economy in shambles… Plus that was the time when all the you know what was hitting the fan with Fannie (FNM) and Freddie (FRE), IndyMac Bank (IDMC), AIG, and a host of other problems… Should be interesting reading… If it isn’t, then they were hiding things…

OK… Let me go through this Gold and Silver stuff again… Some of you missed class the last time I talked about this, so here goes… The metals dealers don’t have ANY supply of coins or bars, PERIOD! Metals dealers haven’t received shipments in some time. The minters had stopped minting because of a backlog in orders. It really is a HUGE mess! And there’s nothing we, the dealers, or minters can do about it.

Now… I know what you’re saying… But Chuck, if there’s a shortage, the price should be going through the roof for the metals… And to that I would say, you are correct sir! (and Ladies!) Can you say, hanky panky? There’s hanky panky going on here folks…

BTW… Gold rallied yesterday… Oil was down… The dollar was up… And Gold rallied? That seems strange to even type much less say! But it’s true , it’s true, I did see a Gold rally! And… It’s rallying again this morning, up $22 right now on the day!

So, the turmoil in the markets continues today… Stocks were off 800 points at one point in the day yesterday before rallying back to close down “only” -370 points… The DOW is now trading below the 10,000 level… YIKES! All I can say is that I’m glad I sold all of my stocks last October! I have no idea what moved me to do that, except that I saw this all coming, as I had chronicled in the Pfennig, and for once in my life I have someone who needs me, no wait, for once in my life I acted on my thoughts for the market!

The euro seems to be in a mini-rally this morning, as I’ve seen it move higher throughout the time I’ve been here writing. There was profit taking in Japanese yen overnight, and the currency is trading back to 102, but 102 is still better than 110! I see where China’s renminbi moved higher VS the dollar, the most it has in one day, in 7 months! Remember, China was on holiday all last week, and therefore left the renminbi unchanged on the week… But that was quickly changed in the first two trading days, and that has to be a good sign for all that talk about a China slowdown!

The Chinese government indicated that the move downward in the renminbi before the holiday was too much, and that they want a “stable currency” to stabilize their markets. Makes sense, eh?

Our little Christine told me last night when we were leaving that she had received a truck load of CD breaks for this morning. UGH! This is not the time to sell into this kind of a market folks… It’s akin to catching a falling knife! But… It’s obvious that they are in panic mode, which I don’t blame them… I don’t know their personal investment situations… According to FDIC, CD holders must have a “financial reason” and a “need for the funds” to break a CD… So, that’s all I have to go on!

Currencies today 10/7/08: A$ .7160, kiwi .63, C$ .9070, euro 1.3585, sterling 1.7450, Swiss .8760, ISK (no quote), rand 8.8130, krone 6.1825, SEK 7.1250, forint 183.90, zloty 2.5350, koruna 18.07, yen 102.10, baht 34.52, sing 1.4640, HKD 7.7660, INR 47.95, China 6.8170, pesos 11.93, BRL 2.1790, dollar index 81.24, Oil $90.40, Silver $11.63, and Gold… $882.25

Source: Iceland Melts Down…

The Aussie dollar is back on the rally tracks this morning after it was announced that Rio Tinto (RTP) is reported to have agreed average iron ore price increases of 80% with China’s largest steel maker Baosteel group. That puts iron ore at a record price, and the Chinese have agreed to pay it! That just brings more revenue to the Aussie Treasure Chest, which helps narrow the Trade Deficit and so on… As I keep saying, I like Aussie to outperform kiwi, because of the astronomical Trade Deficit in New Zealand VS the narrowing Trade Deficit in Australia, and this story plays well with that thought!

There was a currency that got routed yesterday… The Icelandic krona… The Banking Crisis going on there came to a head and the currency just got taken to the woodshed. It’s so bad that the Icelandic Prime Minister thought he had better come to the aid of the currency, saying that the currency, “is likely to stabilize at a stronger level”… The PM also said that Icelandic banks are “more healthy than they appear”…

I hate to say this, but that sounds to me like a General Manager in Baseball giving his manager a “vote of confidence”, only to fire him a week later… I sure hope I’m wrong here, Iceland deservers better… Unfortunately, things just got too heated for such a small country to bear.

Yesterday, I was doing some research for something I’m writing, and I noticed that the top ten currencies year-to-date are all my list of currencies to look to except two #7 Taiwan dollars and #9 Mexican pesos… But for those of you keeping score at home, the list goes like this: 1. Brazilian real, 2. Aussie dollar, 3. Swiss franc, 4. Swedish krona, 5. euro, 6. Danish krone, 7. Taiwan dollars, 8. Norwegian krone, 9. Mexican pesos, 10. Singapore dollar and just for fun, 11. Japanese yen

The Brazilian real is the winner by far though, racking up a better than 10% gain VS the dollar so far this year…

The Chinese renminbi put the brakes on last night… After a week of strong moves VS the dollar, the renminbi applied the brakes as it appears China might be trying to deter speculators from making what they believe to be “one-way” bets on the renminbi. The problem here is that the Chinese won’t follow that one day “hard stance” with about a week of the same… I’m not saying that the Chinese “don’t get it” what I’m saying is that I don’t believe they really truly want to deter speculators…

Source: Dollar’s Mini-rally ends…