Iceland’s newfound love for the loonie is sparking a wave of controversy, from Reykjavik to Ottawa.
For 150 years, the rest of the world has shown scant interest in the Canadian dollar – the poor cousin to the coveted U.S. greenback.
But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.
Canadian ambassador to Iceland Alan Bones had planned to deliver remarks to a conference on the future of the Icelandic Krona, making it clear that if Iceland decided to adopt the Canadian dollar, with all its inherent risks, Canada was ready to talk.
But his speech, slated for Saturday, was abruptly cancelled when news of the remarks was reported in Iceland and Canada, led by The Globe and Mail.
“Once we got wind of [the speech]and it went through the approval channels, we decided it was not an appropriate venue,” said Joseph Lavoie, Foreign Minister John Baird’s press secretary. “It’s a political event. So that the decision was made that it’s not an appropriate event for him to speak at . . . While he may have thought about delivering those remarks, those remarks won’t be delivered.”
Mr. Lavoie pointed to a statement issued late Friday by the department as the government’s official position.
“Canada does not comment publicly on other countries' currencies,” according to the statement. “This is an issue for the Icelandic government and people.”
A group of prominent Icelandic business leaders approached Mr. Bones last year about the idea. And his speech Saturday, to a meeting the country’s opposition Progressive Party, would have been Canada’s first public response.
The Bank of Canada referred all calls about the issue to the Finance Department, where officials were tight-lipped.
There’s a compelling economic case why Iceland would want to adopt the Canadian dollar. It offers the tantalizing prospect of a stable, liquid currency that roughly tracks global commodity prices, nicely matching Iceland’s own economy, which is dependent on fish and aluminum exports, and in the future, energy.
There’s also a more sentimental reason. They’re both cold, Arctic countries.
“The average person looks at it this way: Canada is a younger version of the U.S. Canada has more natural resources than the U.S., it’s less developed, has more land, lots of water,” explained Heidar Gudjonsson, an economist and chairman of the Research Centre for Social and Economic Studies, Iceland’s largest think tank.
“And Canada thinks about the Arctic.”
Officially, the Icelandic government is targeting membership in the 27-member euro zone. But support among Icelanders is slipping.
In a recent Gallup poll, seven out of 10 Icelanders said they would happily dump their volatile and fragile krona for another currency. Their favoured alternative is the Canadian dollar, easily outscoring the U.S. dollar, the euro and the Norwegian krone.
Iceland is in a bind. The country imposed strict currency controls after its spectacular banking collapse in 2008. Foreign-exchange transactions are capped at 350,000 kronur (about $3,500). A major downside of those controls is that foreign investors can’t repatriate their profits, making Iceland an unattractive place to do business.
Those capital controls are slated to start coming off next year. And many experts fear a return to the wild swings of the past – in inflation, lending rates and the currency itself. Iceland is the smallest country in the world still clinging to its own currency and monetary policy. The krona soared nearly 90 per cent between 2001 and 2007, only to crash 92 per cent after the financial crisis in 2008.
The official Icelandic government plan is to adopt the euro. Iceland has applied to join the European Union and eventually the euro zone. But that’s not looking like a very attractive option these days. And formal entry could take a decade, experts said.
The other options are to peg the krona to another currency, such as the yen, greenback or euro.
And finally, there’s the route of unilaterally adopting another country’s money.
It’s hard to imagine Canada would object. Iceland wouldn’t have a say in Canadian monetary policy and the dollars coursing through its small economy ($12-billion in GDP versus Canada’s $1.8-trillion) would be a blip in the Bank of Canada’s management of the money supply.
Unilaterally taking on another country’s currency is not unheard of. El Salvador took on the U.S. dollar in 2001. Ecuador did the same in 2000. And Kosovo adopted the euro in 2002.
There are some good reasons Canada might want to see Iceland embrace the loonie.
“If you join a new currency area it means you are completely open to businesses from that area,” Mr. Gudjonsson pointed out.
Adoption of the Canadian dollar could open opportunities for Canadian shipping companies, fish packers, banks, insurers and eventually oil distributors and service companies as the country taps undeveloped resources.
“Trade between the countries would obviously multiply,” Mr. Gudjonsson argued.
But the greatest benefit for Canada could be enhanced geopolitical influence in a region that’s poised to grow in economic clout.
The Arctic is the last frontier for the mining and oil and gas industries, sectors where Canada is already a global player. The Arctic holds an estimated 22 per cent of the world’s remaining conventional oil and gas, and vast untapped mineral potential.
The transition wouldn’t be easy. The Icelandic government, through its central bank, would authorize commercial banks to exchange kronur for loonies. At today’s exchange rate, it would take roughly 100 kronur to buy a dollar. Iceland would need very strong reserves to conduct the operation, which might require an extended period when both currencies would be in circulation as kronur are soaked up.
Iceland began issuing its own currency, the krona, in 1885, replacing the Danish currency.
Iceland’s banknotes feature such national figures as Arni Magnusson, a 17th-century scholar, and painter Johannes Sveinsson Kjarval.
The flipside of the Iceland notes carry scenes of girls learning to embroider, a monastic scribe and 16th-century printers on the job.
One krona is worth less than a Canadian cent.
The 1,000 krona note bears the image of Brynjolfur Sveinsson, a 17th century Lutheran bishop. He is best known for compiling and preserving Old Norse literature.
$7.87 - the value of 1,000 krona
Canada began issuing its own currency in 1870. Chartered were also allowed to issue their own notes. When the Bank of Canada was created in 1934, assumed responsibility for paper notes and allowed chartered banks to print their own for another 10 years.
Canada’s paper currency features such figures as former prime minister John A. Macdonald and Queen Elizabeth II.
The flipside of Canadian notes features such scenes as children playing hockey, native art and peacekeepers.
Canada’s eighth prime minister, Sir Robert Borden of Nova Scotia, led a Liberal-Conservative Party government from 1911 to 1920. He is best known for leading Canada during the First World War.
12,964 krona - the value of $100