Icelanders can't afford Big Macs anymore

McDonald's is to close its business in Iceland because the country's financial crisis has made it too expensive to operate its franchise. The fast food giant said its three outlets in the country would shut - and that it had no plans to return.

Besides the economy, McDonald's blamed the "unique operational complexity" of doing business in an isolated nation with a population of just 300,000. Iceland's first McDonald's restaurant opened in 1993. The franchises are run by a firm called Lyst, with owner Jon Gardar Ogmundsson saying the decision was "not taken lightly". He said that the restaurants imported the goods from Germany, but that costs had almost doubled, with the falling krona making imports prohibitively expensive.

Mr Ogmundsson said the restaurants had "never been this busy before... but at the same time profits have never been lower". "It just makes no sense. For a kilo of onion, imported from Germany, I'm paying the equivalent of a bottle of good whisky," he added. He now plans to run the restaurants under another name so that he is able to buy cheaper Icelandic products.

Iceland's banks collapsed at the height of the global credit crisis - wrecking the country's economy and forcing it to rely on an $10bn (£6.1bn) international aid package.

David McWilliams discusses the pullout here.

Euro cities cheaper to live in

A new survey released today has shown that Dublin has dropped out of the top 20 most expensive cities in the world, due to lower rents and the euro's fall against the US dollar. The cost of living survey for 2009, carried out by consultants Mercer, puts Dublin as the 25th most expensive of the 143 cities covered. This compares with 16th last year. Tokyo has knocked Moscow off the top spot.

In Mercer’s survey, New York is used as the base city for the index and scores 100 points, all cities are compared against New York and currency movements are measured against the US dollar.

China getting worried about the strength of the US Dollar

China has renewed its call for the creation of a super-sovereign currency to reduce the US dollar's domination of the world's monetary system. It is believed they want the Special Drawing Right, the International Monetary Fund's unit of account, to eventually displace the dollar as the principal reserve currency.

In its annual financial stability report, China's central bank did not mention the dollar by name but said it was a serious defect that one currency should tower over all others.

'An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis,' the People's Bank of China said.

In a veiled call for the US not to erode the value of the dollar through excessively loose monetary and fiscal policies, the PBOC urged closer supervision of those countries that issue the main reserve currencies.

China is no doubt getting worried about the $1.95 trillion in official currency reserves it has in US dollars. Any further big US budgetary and monetary stimuli may well generate inflation, in turn lowering the purchasing power of the US dollar and handing Beijing big losses on its large portfolio of dollar-denominated bonds.

Latvian economy on the brink

Latvia is in danger of becoming the first European Union member to face total economic ruin, experts have warned. Their economy, driven by consumer demand, was hit hard last year amid the global economic downturn. In December the International Monetary Fund approved a 7.5bn euro rescue package for Latvia. Now, the tiny Baltic state has been urged to devalue its currency or risk the collapse of its economy - despite fears such a move could cause turmoil elsewhere in Europe.

Although devaluation would damage Latvia's ambitions of joining the euro, analysts said it was the only hope of avoiding a catastrophe after an international bailout failed to reverse the country's fortunes. One economist said Latvia's economy shrank 18pc in the first three months of the year. "The IMF medicine hasn't worked," he said. "Without a devaluation, you end up in the same place. It just takes longer to get there."

When Latvia joined the EU, expectations were high that the country could soon join the euro and living conditions would improve. It fixed the lat to the euro, allowing it to move within a small band. A small and open country, Latvia quickly attracted investment. The big Swedish banks established subsidiaries and an influx of foreign capital helped sustain a real estate boom.

Rising domestic consumption, a thriving property market and capital inflows all helped spur growth. But says Ed Parker at Fitch Ratings, "one of the problems was that a lot of this foreign capital was directed to real estate development and mortgages rather than building an export oriented manufacturing base. This was in contrast to countries like Poland, where a lot of FDIn(foreign direct investment) was used to set up manufacturing plants. A lot of the development in Latvia went into the real estate sector."

At the same time, its fast growth and a fixed exchange rate pushed prices higher. Latvia became an expensive place to do business. "This excessive optimism plus the entry and aggressive lending policies of foreign banks, led to a huge credit boom and huge current account deficit," said Fitch's Parker. When the capital stopped flooding in, as the credit crunch forced banks to tighten lending, the economy froze.

Sterling takes another pounding

The euro hit new highs against sterling today as the two currencies edged closer to parity. The euro hit 90.06 pence sterling this lunchtime, the latest in a series of record highs against the UK pound in recent days. It later fell back to trade at 89.35 pence this evening. Some holidaymakers travelling to Europe from Britain are reportedly already receiving less than one euro for their pound at bureaux de change, where commission is charged. It is thought short-selling - where investors sell assets such as shares or currencies in the hope of buying them back later at a lower price and pocketing the difference - is also behind the pound's slide.

Effects in the UK of a sinking pound

The pound sterling has plumbed its lowest depths since comparable records began 28 years ago, as investors' exodus from UK financial market intensifies. The Guardian has a good article today on effects of a weak sterling on the UK economy. In particular, it details the consequences for exporters, domestic manufacturing, the tourist industry, the West End, consumers, retailers, and holidays abroad.

Full article

Irish exports to the U.K. are down

Irish exports to the U.K., Ireland’s biggest trading partner, dropped 18% in August as the British economy slid into a recession and the euro’s advance against sterling eroded competitiveness. Weak sterling means Irish products are dearer in the U.K. Sales to the U.K. fell to €958m in August from €1.17billion in the same month a year earlier, according to the CSO today. Figures for the three months through September show sales abroad dropped 3.7% from a year earlier in the third quarter to €20.8billion. The euro has increased 14% against sterling this year, eroding Irish companies' profit margins. A housing slump and the financial crisis have pushed the U.K. to the brink of a recession, cooling demand for imports.

Sterling hits new low against the euro

Sterling hit a new low against the euro this evening. At the low point in trading today, £1 bought just under €1.22 - marking the UK currency's weakest performance against the euro since its launch in 1999. The euro's strength comes in the wake of UK interest rates being slashed by 1.5% to 3% last week by the Bank of England. By 6pm, the euro was trading at $1.2766 and at £0.8167. This means of course that shopping up the north is cheaper but its bad news for Irish companies exporting to Britain because their goods become more expensive there.