Iceland: Crisis? What crisis?
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Iceland: Crisis? What crisis?

When Fitch put Iceland on a negative rating outlook in February the country was facing a heavy current account deficit as well as an asset price and credit bubble. But the banks and politicians think that it was all a misunderstanding. Laurence Neville reports.

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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 IMF and the OECD declared that financial stability in Iceland was not at risk and that its banks were safe. And while spreads on Icelandic banks’ outstanding bonds remain wider than they were before the crisis and the krona has failed to recover against the dollar, the market appears to be coming to the same conclusion – the crisis was really one of perception.

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