Iceland shows eurozone how to fight crisis

Iceland's Prime Minister Johanna Sigurdardottir. (Reuters / Bob Strong)

Before Greece and Portugal, it was Iceland that chilled investors. Now the country’s finances are recovering and its bonds are turning into a lucrative investment.
­Fitch has upgraded Iceland’s sovereign credit rating from BB+ to BBB- with a stable outlook. The rating agency lifted “the junk bond status” saying the country’s “unorthodox crisis policy response has succeeded.”
In 2008 Iceland faced the worst financial crisis in its history as three leading banks defaulted under the weight of huge foreign debt. As it became clear the default were inevitable Iceland’s government nationalized the banks, while foreign creditors were left holding the bag.
“A Major part of Iceland’s debt has been written off. That means the country has more chances to pay its debts. So Iceland’s bonds are more attractive to investors than those of Greece or Portugal”, commented Tamerlan  Khassimikov, the head of BST Capital Management.
The country also received a $2.2 billion bailout from the IMF and carried out structural reforms which enabled Iceland to reduce its fiscal deficit.  The devaluation of the Icelandic krona contributed to the country’s exports. 
“The Icelandic krona unlike the euro is supported by the country’s production. Now the fishing industry creates 46% of Iceland’s GDP and exports are growing”, said Mr. Khassimikov.
But it wasn’t only effective crisis management that helped Iceland stay afloat, according to the expert. “Iceland is a disciplined country, it used not to spend much more than it has”, Mr Khassimikov said. “The fiscal deficit was formed during the crisis, because Iceland’s banks are a part of global banking. As for Greece, it became a victim of its own careless approach to finance”.
Analysts agree Iceland’s crisis approach is hardly applicable to the euro-zone countries as they can’t devalue the currency by themselves. But Iceland definitely shows a textbook example of a thrifty financial policy.

Gas Prices Are Going Up No Matter What Happens In Iran

Oil futures spiked more than 2% in one day to their highest level in nine months on Tuesday Feb. 21.  WTI front month contract closed at $105.84, while Brent ended at $121.66 on ICE, primarily on investors fear of potential conflict over the escalating tensions between the US, Europe, Israel, and Iran.  A second Greek bailout deal of €130bn (£110bn; $170bn) also helped to inject some optimism into the market (which would seem totally mis-placed as we may need to relive this Greek drama in two years).  Nevertheless, the fact remains crude oil market supply and demand has not changed a bit to warrant a 2%+ price jump in one day.
The U.S. and its allies believe Iran is building nuclear weapons, which Tehran has vehemently denied. Last week, the European Union (EU) imposed a ban on Iran oil imports effective July 1, and froze the assets of its central bank. In December, the U.S. said it would "blacklist" companies in the U.S. market if they do business with Iran’s central bank.

In retaliation, over the weekend, Iran announced that it halted oil exports to France and the United Kingdom and warned European companies that it would halt their supplies unless they sign long-term contracts.  However, France and UK do not import a significant portion of crude oil from Iran, and Europe could most likely still get alternative crude supplies from other sources like Saudi, or Russia.

Despite Iran oil ministry spokesman Alireza Nikzad's statement that "we will sell our oil to new customers," according to Financial Times, Tehran is “struggling” to find a new buyer for the estimated 500,000 barrels of oil per day left as surplus from its decision to halt sales to France and the UK.  And another Reuters report quoting commodities traders that "Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food as new financial sanctions have hurt its ability to import basic staples for its 74 million people....Difficulty paying for urgent import needs has contributed to sharp rises in the prices of basic foodstuffs, causing hardship for Iranians."

 

Chart Source: CNN

Earlier report from AP suggested that Iran still had support from its major Asian buyers as India has joined China in saying it will not cut back on oil imports from Iran.  But the latest development, according to Reuters, is that China, India and Japan are now planning cuts of at least 10% in Iranian crude imports as tightening U.S. sanctions make it difficult to keep doing business with Iran. China, India and Japan together buy about 45% of Iran's crude exports.  So the cut-back on Iranian oil imports from these three big clients will be yet another serious blow to Iran.

Iran is OPEC's second-largest producer after Saudi Arabia, and exports 2.5 million barrels of oil per day, about 3% of world supplies. About 500,000 barrels go to Europe and most of the rest goes to China, India, Japan and South Korea.

Earlier this month, the International Energy Agency cut its 2012 oil-demand growth forecast for the second time in just a few weeks and said the decrease in demand would leave the oil market with enough flexibility to adjust to any loss of Iranian crude exports when sanctions take effect in July.  So similar to the "Libyan sweet crude supply crisis" of last year, even if oil exports from Iran goes completely off line, the shortfall would not be such a crisis as priced in right now by investor's fear.

However, the reality remains that crude oil prices get disproportionately distorted and detached from supply and demand fundamentals whenever there's a whiff of geopolitical tension and conflict.

Right now, it seems Iran could be the one blinks first (war or peace) with multiple sanctions putting mounting pressure on the country's basic necessity imports, while hurting its oil revenue.  But with Iran still a volatile unknown, analysts say oil could continue to rise and expect to see gasoline at $4 a gallon, and some even see $5, heading into the summer driving season.

If the analysts were right, $4 or $5 gasoline by summer time would certainly be detrimental to the nascent U.S. recovery, and debt-troubled Europe, which could bring demand destruction pushing oil prices back down.

Crude oil prices or Iran, no matter who blinks first, one thing for certain is that consumers most likely will end up footing the bill of higher fuel costs, and world economy would suffer as a whole in the process as well.

Read more: http://feedproxy.google.com/~r/EconForecastFullFeed/~3/VJkVU_k4f7c/crude-oil-vs-iran-who-blinks-first.html#ixzz1n80hLjVL

Is the U.S. losing faith in its own dollar? Bills proposed in more than a dozen states to make gold and silver legal currency for use

• Bill to legalise gold & silver coins as usable currency
• GOP proposal comes among financial uncertainties
• These coins keep face value even if metal price moves
• Would not lead to people carrying gold in their purse

U.S. politicians are rapidly losing faith in the dollar, with more than a dozen states proposing legislation to legalise gold and silver as a currency.
Politicians in Colorado concerned about the nation's financial stability are the latest to push a bill to legalise gold and silver coins as usable currency.
But from a consumer angle the conservative bill would not lead to people carrying gold nuggets in their purses and would have little practical effect.

Varying values: Five coins on the left were minted over 100 years ago and are worth thousands of dollars. The five on the right were minted in the last few years and are worth their face values of $1 to $25

The GOP proposal reflects anxieties about the domestic consequences of the European debt crisis and chronic deficit spending in Washington D.C.

Backup: Republican Senator Kent Lambert's bill in Colorado is designed to provide consumers with alternatives in case the dollar falls badly

‘There are lots of concerns about the U.S. monetary system,’ said the bill's sponsor, Republican Senator Kent Lambert of Colorado Springs.
‘There's no way to maintain the value of anything if countries start a race to the bottom by inflating their currency to get out of debt.’

 

More...

• Evacuation warning to Britons in Greece as country prepares to sign off yet another rescue package

GOP presidential candidate Ron Paul believes the U.S. should return to the gold standard, so paper currency is guaranteed by precious metal.
‘I am not a Ron Paul kind of guy,’ Senator Lambert said. ‘But that's something I think is very legitimate that he brought up.’
Utah legalised gold and silver as a currency option last year. Politicians in more than 12 other states have proposed similar legislation on currency.
Rich Danker of Washington-based conservative think tank the American Principles Project favours a return to the gold standard.

‘These bills offer a sound monetary alternative to the U.S. dollar,’ he said. ‘They allow people to store their wealth in coins that will not decrease in value.’

Support: GOP presidential candidate Ron Paul believes the U.S. should return to the gold standard, so paper currency is guaranteed by precious metal

THE GOLD STANDARD IN PROFILE

Minted U.S. gold and silver coins retain their face value, even if the value of the coins' precious metals rises.
So a $20 gold coin minted in the 1800s is still legally worth $20, even though its real value may be thousands of dollars in today's market.
Gold was trading at above $1,700 an ounce last Friday. The U.S. largely abandoned gold-backed money during World War One to pay for the war.
President Franklin D. Roosevelt basically banned gold and silver as legal currency to prevent hoarding during the Great Depression.
President Richard Nixon formally abandoned the gold standard in 1971.

The Colorado proposal faces long odds. People who want to spend gold and silver coins currently have to convert them to paper dollars first.
Gold and silver coins made by the U.S. Mint are mostly used for investment portfolios. People can trade them, with capital gains taxes on profits.
Senator Lambert's bill is designed to provide consumers alternatives in case the dollar falls badly. It would not make merchants accept nuggets of gold and silver as payment.
Colorado has a rich mining history, and its gold and silver caches helped finance construction of the state Capitol in the 19th century.
The state no longer keeps reserves of gold nor silver, although gold and silver bullion are kept at the U.S. Mint in Denver, near to the Capitol.
The bill cleared a Senate committee and awaits a vote in the full chamber.

Read more: http://www.dailymail.co.uk/news/article-2103977/Politicians-losing-faith-strength-dollar-propose-make-gold-silver-legal-currency.html#ixzz1n804OhMB