Iceland's Devaluation Toll: McDonald's

Recently we dealt with The Evils Of Devaluation. And Iceland should be a good example.

Last year's meltdown heavily devastated Iceland, an erstwhile prosperous nation but whose banking system recklessly engaged in intensive leveraged based speculation [see last year's post Iceland, the Next Zimbabwe? A “Riches To Rags” Tale? ]

The consequent losses in the banking system prompted Iceland's government to intervene and provide support even when there had not been enough resources to do so. This eventually took toll on its currency, the Krona.

The Krona has devalued or collapsed from 60 to around 140 (chart courtesy of ino.com).

This fueled domestic inflation even amidst a spike in unemployment.

chart courtesy of tradingeconomics.com

Nevertheless Iceland's crisis has prompted one of the world's most prolific fast food chain, McDonald's (NYSE: MCD), to withdraw.

This from Financial Times

``Iceland edged further towards the margins of the global economy on Monday when McDonald's announced the closure of its three restaurants in the crisis-hit country and said that it had no plans to return.

``The move will see Iceland, one of the world's wealthiest nations per capita until the collapse of its banking sector last year, join Albania, Armenia and Bosnia and Herzegovina in a small band of European countries without a McDonald's.

``The loss of the Golden Arches highlights the extent of Iceland's economic demise since the pre-crisis boom years when its "Viking Raider" entrepreneurs turned Reykjavik into an international finance centre and launched a buying spree of high-profile European assets."

The reason...

``McDonald's blamed the closures on the "very challenging economic climate" and the "unique operational complexity" of doing business in an island nation of just 300,000 people on the edge of the Arctic Circle.

``Most ingredients used by McDonald's in Iceland are imported from Germany - leading to a doubling in costs as the krona has collapsed while the euro has strengthened.

``Magnus Ogmundsson, managing director of Lyst, the McDonald's franchise holder in Iceland, said that price rises of at least 20 per cent were needed to produce an acceptable profit. That would have pushed the price of a Big Mac burger well above the $5.75 it costs to buy one in Switzerland, home to the world's most expensive McDonald's, according to the Big Mac index."

Of course somebody's else problem could serve as another person's solution:

It could be argued that this should be healthy as there would be less junk foods.

Or that Iceland will have to rely more on their own.

Again the FT, ``Mr Ogmundsson admitted that some customers were alarmed by the symbolism of such a recognisable brand abandoning Iceland but others have reacted positively. "People are pleased that we will be sourcing more goods locally," he says.

Overall, Icelanders would have lesser choice and diminished privileges from today's modern society. In short, Iceland's living standard has retrogressed.