Iceland Canadian Dollar, UPDATE: The government of Canada is backing away from a proposal for Iceland to adopt the Canadian dollar, cancelling a speech by a diplomat that would have announced Ottawa is not opposed to the idea.
“Once we got wind of [the speech] and it went through the approval channels, we decided it was not an appropriate venue,” Joseph Lavoie, press secretary to Foreign Minister John Baird, told the Globe and Mail. “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.”
A Canadian official told the Wall Street Journal that Ottawa is “not endorsing” a proposal popular within Iceland’s opposition Progressive Party to have Iceland replace its struggling krona with the loonie.
The party has opposed Iceland’s bid to join the European Union, and proposed switching to the Canadian dollar as a way to stabilize its economy without tying itself to the struggling euro area. Popular support for joining the EU and the euro has dropped sharply in Iceland, in the wake of the Greek debt crisis. However, talks to enter the European Union continue under the ruling Social Democratic Alliance party.
In a blog posting Sunday, Carleton University economist Nicholas Rowe suggested Icelandic adoption of the Canadian dollar could end up costing Canada money, if the Bank of Canada is expected to act as a “lender of last resort” to Iceland should another economic crisis hit the country.
Iceland can use the Canadian dollar if it so wishes, Canada’s ambassador to the country is expected to say Saturday.
According to a report in the Globe and Mail, Alan Bones is expected to give a speech to Iceland’s opposition Progressive Party announcing that Canada won’t object to Iceland unilaterally deciding to use the loonie — so long as the Nordic country is aware of the risks.
Economists in Iceland suggested last summer that the country could stabilize its economy by adopting the Canadian dollar.
Iceland’s economy suffered a crushing blow in 2008 when its banking sector went bust, causing its currency to collapse. The krona lost about 60 per cent of its value and has not recovered. To stabilize the economy, the government instituted currency controls that prevent anyone from taking more than the equivalent of $3,000 out of the country.
That has made Iceland an unattractive place for foreign investors. The currency controls are slated to come down, but many Icelandic economists worry that will mean a return to economic instability. Some of them have suggested simply replacing the Icelandic krona with another, more stable, currency.
In a recent poll, some 70 per cent of Icelanders said they would favour dropping the krona in favour of a foreign currency, and the Canadian dollar was the most preferred option, the Globe and Mail reports.
Canada’s currency has developed a very positive reputation around the world, thanks to its solid run-up in value in recent years — largely due to energy exports — and due to the perception that Canada avoided the financial crisis that hit banks in the U.S., U.K. and elsewhere.