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One of the main gaming tables in the pre-bust Icelandic financial casino were loans denominated in ISK but with interest indexed to other currencies.

That should be "principals" where you wrote "interest," no?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 5th, 2010 at 10:33:39 AM EST
mmm. Interest (I) was the fx value of one ISK  --ISK:whatevercurrencylenderchooses-- applied to a simple repayment formula. Principal (amount of ISKs or bananas) is |fixed|; the formula doesn't modify value of P. But product of I x P fluctuates, ergo total interest paid a/k/a lender profit amortized at loan maturity, according to open market demand for one ISK at any given time.

                             (I / (12 x 100))
         pymt  =  P  x   ------------------------

                             1  - ( 1 + J ) ^ -N

The fact that the Icelandic supreme court recognised in their ruling is that no fx transaction took place when an icelandic individual borrowed a fx linked loan. The banks did not reach into their Euro piggy, pulled out a 1000 Euros and hand them over to the borrower to sell on the fx market. They reached into their krona piggy, handed over the 100.000 kronas to the borrower and then made out the loan agreement in a way that linked the repayments to the exchange rate. This was a perfect way to hedge their own fx exposure...without the borrower ever knowing the true risk he was undertaking. Magnús Birgisson

The grift was a slightly fancier Wachovia pick-a-pay offer.

Diversity is the key to economic and political evolution.

by Cat on Wed Jul 7th, 2010 at 11:16:25 AM EST
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