VZCZCXRO5831
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHRK #0203 2621231
ZNR UUUUU ZZH
P 181231Z SEP 08
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 3799
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS REYKJAVIK 000203 
 
USDOC FOR LEAH MARKOWITZ 
TREASURY FOR LAWRENCE NORTON 
STOCKHOLM FOR FCS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN IC
SUBJECT:  ICELANDIC KRONA DROPS TO NEW LOW, INCREASING CALLS TO 
ADOPT EURO 
 
REFS: A) REYKJAVIK 85, B) REYKJAVIK 66, C) REYKJAVIK 55 
 
¶1. (U) As a result of the international financial crisis and lack of 
liquidity in the credit markets, the Icelandic krona (ISK) has taken 
a beating, falling almost 50 percent since the start of the year. 
On September 17 the ISK trade weighted index, which measures the 
price in ISK of a weighted average of the currencies of Iceland's 
biggest trade partners, hit a record high.  There is consensus among 
most Icelandic experts that the ISK has hit close to bottom, but 
none predict when it will start strengthening. 
 
¶2. (U) Iceland is very dependent on imports and the exchange rate 
has a large influence on prices of consumer goods.  The 12-month 
inflation rate now measures at 14.5 percent.  Many Icelanders are 
also feeling the pinch as their monthly payments on foreign currency 
loans -- a common instrument for car loans and mortgages -- have 
risen dramatically. 
 
¶3. (U) Calls for adopting the Euro have increased as the ISK has 
slipped.  Prominent members of the Progressive Party, an opposition 
party in Parliament, are proposing a referendum in early 2009 on 
joining the EU.  However, Prime Minister Geir Haarde continues to 
take what he calls a pragmatic approach to the currency issue and he 
believes the benefits of keeping the ISK outweigh those of adopting 
the Euro at this time. 
 
KLOPFENSTEIN