Iceland: Crisis? What crisis?

ICELAND UNDENIABLY EXPERIENCED a financial crisis earlier this year. A revision of its long-term sovereign rating outlook to negative by Fitch Ratings on February 22 prompted the krona to fall by more than 20% and spreads on sovereign and bank debt ballooned. Iceland’s leading politicians and bankers were required to step up and reassure investors that the country wasn’t in meltdown.

But what sort of crisis did Iceland experience? Did jitters in the financial markets reflect fundamental concern about the rapid growth of the economy and the acquisitive nature of the country’s three main banks and their reliance on international funding? Or was Iceland simply the victim of the skittishness of hedge funds in an era of rapid mobility of capital?

In August, Moody’s Investors Service, the...