Could the credit mess that ate investment bank Bear Stearns and ended the careers of a thousands of wannabe U.S. realtors also kill a whole country?
It might just kill Iceland.
Rumors are running rampant that the tiny Scandinavian country is the target of wise-guy hedge fund types who think the economy and its currency, the krona, are due for a big correction.
After years of steady growth, the central bank now expects a 2.5 percent contraction in the economy in 2009 and 1.5 percent in 2010.
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Ratings agency Standard & Poor’s has cut the country’s credit rating, citing potential problems with its banks. Fitch Ratings has followed suit, downgrading the banks and the country’s own debt.
Soon after, Moody's Investors Service said in an annual report on the country that, although a crash was unlikely, Iceland’s economy could post negative growth for a few quarters.
Meanwhile, Iceland’s central bank pushed rates to 15.5 percent. The krona is off nearly 29 percent against the euro since the start of the year.
"Investors are worried because the banks have no real access to the markets” because of the credit squeeze, Paul Rawkins, a senior director and Iceland expert at Fitch told The New York Times.
"Their next stop will be the government, which would have to bail them out. But the government doesn’t have the checkbook to pay for it.”
Its official inflation target is 2.5 percent a year. The bank now forecasts 7 percent in the first quarter and 9.7 percent for the second. Iceland’s current account deficit is at 16 percent of its economic output, triple that of the United States.
Arni Mathiesen, the country’s finance minister, defended the economy after the S&P decision and said if anything the krona was undervalued.
As for economic conditions, he said, "I don't see them getting worse."
In question are Iceland’s big three banks, which some fear have bitten off far more than they can chew.
Although the banks did not get involved in subprime instruments, according to The New York Times, the sudden scarcity of credit has put the country in a bind.
Worse still are rumors that hedge fund managers in Iceland and elsewhere are betting on a collapse. Icelandic financial authorities are investigating.
© NewsMax 2008. All rights reserved.
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