In a nutshell, the government first guarantees all the banks’ deposits. Then the buy side — the Icelandic pension funds, which have billions of dollars in foreign securities — sell everything they own abroad, and bring it back home. At an exchange rate of 126 kronur to the dollar, that will buy them a lot of kronur. (The currency has lost fully half its value over the past year.) The banks, too, will liquidate their foreign holdings, and bring them all back home.
Mr. Salmon thinks that this is a shrewd move. But how would you like to be a pensioner in Iceland right about now? This is a trick that only works once and then what?
For more info on the current sate of Iceland see this piece in Spiegel.
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