Reuters just published that Iceland's central bank announced today Russia's agreement to provide the country with loans of 4 billion euros ($5.4 billion) - about half of Iceland's c.$11 billion GDP.
The central bank said the loans were for 3-4 years on terms that would be 30-50 points above Libor rates (very attractive loan terms).
The Icelandic Kroner has stabilised dramatically following this announcement and regained some of the value it has lost over recent days.
Figure 1: Icelandic currency
The big question is why? And what does this mean for the future? The loan terms etc. suggest Russia is not pricing risk for the well run but high risk Icelandic economy the same way the market is (see Figure 2). This however, is not a financial investment for Russia - the geopolitical implications for the world may be far more significant than are the economic implications (though for Iceland of course both economic and geopolitical implications are likely to be significant!).
Figure 2: Iceland - Credit Default Swaps (market price for risk of default)
Shall write on this as soon as I have a moment!
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