Earn 15.55% Return On Snow Wolves

The central bank of Iceland has increased overnight borrowing rates to 15.5%, meaning you can get some damn high yields investing in their currency. Those numbers piqued my interest.

I tried looking for ways to get into one of the nation’s three leading banks, Kaupthing, Glitnir and SPRON, as a US-citizen. Kaputhing isn’t available for the US, Glitnir makes you go to your local bank around the corner, in Iceland, to sign up, and SPRON didn’t seem to have any info. I know there’s foreign currency exchange sites out there for the individual investor, but I’m not sure which ones are reputable…most look sketchy to me.

I do know at least that, per this NYT article,investing in foreign currency can be dicey. The market is volatile, you can be subject to weird laws, currency exchange rates will eat into your earnings, and you can be penalized for unwinding your position early. Any more informed Consumerist readers care to share how to dip one’s toes in the frigid waters of the króna without getting devoured?

Now That’s a Tip! [Baron’s]
While Alluring, Foreign Currencies Can Be Elusive [NYT]

Comments

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  1. Erwos says:

    Here’s what you do: whenever you see high interest rates, think high risk. Because risk=return. They’re not offering 15% because things are good.

  2. wgrune says:

    I heard an interview on Marketplace Money(maybe?) about someone asking a similar question about investing in foreign companies/currency. They talked breifly about some of the laws/regulations/penalties/etc associated with said investing. The expert opinion: invest in mutual funds with holdings in the companies and or countries you are interested in.

    • johnva says:

      @wgrune: There are also ETFs that you can buy here in the U.S. that essentially simulate a money market account denominated in a foreign currency. Of course, it’s not FDIC insured, and is subject to exchange rate risk, etc.

  3. woot says:

    CD rates are pretty high there too, which is a much more accessible financial vehicle for the general public, but there is very significant currency risk and high inflation to factor in to anything Iceland-related. Here’s a discussion thread that should help anyone who’s interested: [www.fatwallet.com]

  4. JeffMc says:

    If you’re really interested in foreign currency exchange sites I can vouch for both XE.COM (www.xe.com) and Custom House Global Foreign Exchange (www.customhouse.com).

    Because when doing foreign exchange the word of a stranger on the internet means something. :)

    Seriously, though, I’ve done development work with both of them and they’re both real, reputable companies.

  5. alstein says:

    I’m wondering if this has any similarity to the pre-Euro interest rate wars of the late 90s.

  6. zentex says:

    Those numbers piqued my interest

    HORRIBLE Ben…just horrible. But you forgot to say “i’ll be here all week, be sure to tip your waitress”.

  7. Canino says:

    To heck with interest rates, where can I get one of those money-eyed dogs? Walk one of those around the park and chicks would be all over me…

  8. I’m going to see Sigur Ros in concert next month, maybe you can cut me a check and I’ll hand it over to them to take care of when they get back home. Speaking of which, that gives me a good idea to start a new kind of fraud: the Icelandic 419 Scam!

  9. souhaite says:

    Those numbers are so high because Iceland’s economy is in the sh*tter right now:

    “This year, though, the country’s currency, the króna, has fallen twenty-two per cent against the euro; the economy has stagnated; and a global rating agency has put the nation’s three major banks on a credit watch. Now analysts are wondering whether the new Nordic Tiger will end up, instead, as ‘the Bear Stearns of the North Atlantic.'”

    Not exactly a great time to invest there.

  10. FrankTheTank says:

    Don’t forget about exchange rates.
    Presumably, if you get a 15% return on Icelandic Krona, it’s likely that it’s value against the dollar will weaken in the world market. So, unless you believe the American dollar will weaken further or have some knowledge that the rest of the world doesn’t about the future market conditions of Iceland or the US, there is no net opportunity for gain.

    At the end of the day, just remember, if it seems too good to be true…

    especially in the world of finance, where hundreds of people WAAAAY smarter than you, with hundreds of millions of dollars more than you have probably already taken away the opportunity through their investments.

  11. The bottom-line Ben is you can’t make money this way. What you’re trying to find is an arbitrage opportunity. Well, it’s not actually arbitrage, because the transactions wouldn’t occur simultaneously, but the idea is the same. You think there’s a “market error” that can be taken advantage of. With transaction costs and currency risk w/ the krona, there’s no error here.

  12. BeeBoo says:

    You can get Krona-denominated CDs at EverBank, along with many other currencies. But what you’re really doing is speculating in currency as well as buying a CD, just recognize the double risk. They have a good bit of information regarding this type of investment and the minimum deposit is only $10K.

    In general, I recommend EverBank highly, low fees, high interest, good friendly fast customer service, refunds ATM fees.

    Foreign currency CDs:
    [www.everbank.com]

  13. Walkallovaya says:

    There is an ETF that specifically invests in high-yield currencies. It’s the PowerShares DB G10 Currency Harvest (DBV). This tracks an index which is “comprised of long futures positions on the three G10 currencies associated with the highest interest rates and short futures positions on the three currencies associated with the lowest interest rates.” This fund is invested in the 3 highest rate G10 currencies, all of which are more stable than the ISK. If you are specifically interested in taking advantage of high rates in certain countries, this is a reasonably safe way to do that since only the G10 are included; however, this strategy is no sure thing.

  14. mannyv says:

    It depends, though, on where these people are looking. Overseas investments can be more lucrative because they’re harder to research and thus have more perceived risk. If you do the legwork, you might find good deals. Factor in currency risk, transaction fees, etc, before making a decision. You might still be able to squeak 7-8%, but only you can determine whether it’s worth it or not.

    Saying that someone is smarter and has lots more money might mean that they’re lazy and stay home watching for domestic market opportunities. There’s a reason why most mutual funds only offer a few international funds – it’s more work to do the research and due diligence, and you might have to read documents in a language other than English (horrors!).

    Again, run the numbers yourself and see. There’s no reason to listen to any of us yahoos doing a priori analysis and running thought experiments. If you had numbers, then we could dig in and really see if it was possible or not. Then again, if you had the numbers you wouldn’t need to ask this board (you’d be asking over at fatwallet).

  15. civicmon says:

    What this post is missing is that the Icelandic Krona has lost nearly 20% of it’s value this year alone.

    The Wall St Journal next to my desk says that the Krona has lost about 20% of it’s value vs. the USD. I think the real amount has been 25%.

    So, with a 15.5% interest rate, the real return is negative 4.5%

    That’s not a good investment in my world.

    [finance.google.com]

    The current rate for today is 82 Krona/$1 – it started the year around ~63/$1.

    This is a bad article and while written for the right reason, a person who invested in Krona-denominated bonds would have a negative real-return after expenses and the forex depreciation.

    I do this for a living… I really suggest that the novice even avoid these sorts of investments since the currency dynamics can really kill an investment’s value.

    There’s a reason why the Krona has lost ~25% this year. There’s another reason why their bonds pay 15.5%… it’s because inflation is probably closer to 20%.

  16. psychos says:

    http://www.forex.com has a free practice account that pulls from actual foreign exchange rates and uses their actual trading platform. It’s kind of cool to play with, if you want to play around with foreign exchange and not lose real money. I’m guessing other online foreign exchange places offer similar.

    I ended up losing a decent chunk of virtual money after wasting some time and gave up on it. :)

  17. Wormfather is Wormfather says:

    Before opening your checkbook take a look at their benchmarked inflation, I just did they they have a target of 2.5% with a diviation of +/- 1.25%. That is redonkulous. They have a stable govenment and economy but they are not part of the EU which could make investing there a bit of a headache.

    However, if you can get a 15% return over a year on a $100K with 7% towards fees, taxes and exchange you’ve only made about 8 grand which is $2K more than you could make here with the best bonds/cds, but you’ve got a headach to show for it.

  18. Wormfather is Wormfather says:

    Or you can defer to civicmon who has a better insight into these things. I did forget to mesure the krona vs dollar/euro. With that said there would be three reasons to invest in Iceland:

    1. You live in Iceland and/or plan on retiring there, with the returns beating inflation your money should outlive you.
    2. You know for a fact that they will be joining the EU and converting to the Euro (doubt it)
    3. You thought you were ordering a Corona.

  19. crackle says:

    forex.com

  20. AlexPDL says:

    Snow wolves??? What’s that about? I treked across Iceland. There are no wolves, bears, or dangerous predators. Definitely no snow wolves.

  21. civicmon says:

    This turned out well….