For some people, Iceland has replaced Ireland as the model du jour that we should be aping as quickly as possible.
Yada yada yada.
None of the proponents of the Iceland model actually talk about the Iceland model as it actually is; they just talk about what they fantasize it means. That's largely just an excuse to avoid dealing with local issues in a practical way, of course.
Well, one of the costs of Iceland's supposed economic miracle is a currency that is dropping against the Euro. As a result, the Icelandic central bank has raised interests rates to 14.25%. It's been about 15 years since we've seen those kinds of interest rates in Canada.
Investors are keeping a close eye on the Iceland situation since the whole economic tension is coming from a government deficit on current account that is running at 27% of gross domestic product in the third quarter.
To put that in context, that's the equivalent of the provincial government here running a deficit - in a three month period just ended - of around $1.35 billion. That's just in one quarter, and assuming the economic output in the economy right at the moment is about $5.0 billion per quarter.
At that rate, Newfoundland and Labrador would add another $5.0 billion or so to its debt in a single year. The current consolidated accrual debt at the moment is estimated at $11.0 billion. The whole government budget this year is in the neighbourhood of $5.0 billion.
Iceland might be able to manage that in short term. For Newfoundland and Labrador, that kind of economic mess would rival the stuff that led to the collapse of responsible government in 1934.
The story has been picked up as far away as Shanghai, based on the Bloomberg story.
This is the 18th time the central bank has raised interest rates since May 2004.
