FT Alphaville " A game of krónur Some intriguing thoughts from Sebastien Galy, Societe Generale FX strategist, on Icelandic politicians" interest in the Canadian dollar: An independent currency for a country with the population of the size of a decently sized Canadian city was always going to be a problem. Having that country run a financial bubble while offering very high yield was a recipe for a very rapid rise of a financial empire followed by a catastrophic collapse with the currency ceasing to have a market at one point. The past few years have been of picking up the broken pieces and a move to a new currency would help to bring credibility while forcing adjustments in internal prices. While Canadians may feel good about these developments, pride does beget the fall. Canada has been helped by a highly controlled banking system. The side effect is that it relied on the US and global banks to make markets in many Canadian products, leaving the BoC to challenge recent regulatory steps in the US. More importantly, the BoC has stayed on hold to let its tradable sector adjust to the expected rise in the CAD. This soft approach means that capital may be increasingly misallocated at too low a rate (e.g. Potentially housing). The more German approach, familiar to many german communities in Canada, is to get down and fix the productivity issue, irrespective of any short term pain. There is a fine balance between the easy [and the] hard way, we must all tackle whether in Iceland, Europe or Canada. It's all very Political with a capital P. Maybe one reason why Canada's ambassador held off making a planned speech in which he would have declared his government was "ready to talk" to the world's 18th biggest island about swapping the króna for the loonie. Maybe also, in the eurozone crisis era, we're all a bit more jaded about adopting currencies without monetary control. Not to mention adopting them when (in the case of Iceland) you are still faced with onshore and offshore versions of your old currency, and you're still halfway through managing capital controls and rebuilding FX reserves. Also, shades of Newfoundland?... Canada fully absorbed Britain's oldest colony as its tenth province in 1949, 15 years after a debt crisis had forced Newfoundland back under London's direct control. Just a bit involved more than a currency switch - but shows that Canada's been seen as a long-term solution to a North Atlantic debt bust once before. Related link: Doing a Newfoundland - FT Alphaville This entry was posted by Joseph Cotterill on Monday, March 5th, 2012 at 9:03 and is filed under Capital markets. Tagged with canada, currencies, iceland, loonie.