Some people in Iceland want to abandon the Krona and adopt the Loonie. This came as rather a surprise to me. Here are some thoughts off the top of my head:
2. Who does Iceland imagine would act as lender of last resort to Icelandic banks? In 2008 Iceland's banks defaulted on their foreign currency liabilities. I am very glad that the Bank of Canada was not obliged to act as lender of last resort to Icelandic banks in 2008. Does Iceland think it can manage without a lender of last resort to its banking system? It didn't work so well in 2008.
3. The government of Iceland would presumably be issuing Loonie bonds. Given the recent experience of the Eurozone, governments borrowing in a foreign currency -- which they cannot themselves print -- does not look like a very stable arrangement. If the Eurozone has very weak fiscal relations, those between Iceland and Canada are non-existent. Would Canada be expected to play Germany to Iceland's Greece?
4. If there were a financial crisis in Iceland, is there any possibility that could spillover and affect Canada's financial markets and the exchange rate? Would the Bank of Canada be forced to act as lender of last resort to Iceland's government or banks in order to protect Canadian financial markets and the exchange rate from the fallout?
5. If Canada decided that it was not in Canada's national interest for Iceland to adopt the Loonie, is there anything Canada could actually do to prevent Iceland unilaterally adopting the Loonie?
6. (Update) One clear benefit to Canada would be the extra seigniorage revenue. Assume Iceland's GDP is 1% of Canadian GDP, the currency/GDP ratio is 5%, and the long-term nominal interest rate is 4%. The extra seigniorage from iceland adopting the Loonie would be 1% x 5% x 4% = 0.002% of Canadian GDP (somebody check my math please).