Króna in chaos during Iceland's meltdown

Sedlabanki pegged the króna to a trade-weighted basket of currencies on October 7 to avoid the collapse of the currency, but it U-turned the next day in response to criticism. The króna was fixed at EUR/ISK 131, based on a basket weighting the dollar, euro and sterling at 76% with the remainder split between the Nordic currencies (excluding Finland), yen, Swiss franc and Canadian dollar.

Spot, fowards and options trading in the currency came to a standstill last Wednesday, as the country's largest banks were nationalised. The government seized control of Kaupthing on Thursday, soon after it had bailed out Glitnir and Landisbanki.

"There are problems with settling the trades, with the major market-makers in the small economy going bankrupt," said Antje Praefcke, currency analyst at Commerzbank in Frankfurt.

Iceland has also suffered currency issuer downgrades from rating agencies Fitch and Moody's over the bail-out of its banks, three of the largest being over nine times the size of its gross domestic product.

Gail Mwamba

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