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Foreign Investment: Iceland’s krona hits the skids

Today's Financial News - Posted May 20, 2008

“Banks all over the world have spent much of the few years bingeing on cheap money, but Iceland’s taken the whole thing to quite an extreme. Its big players – the likes of Landsbanki and Kaupthing – have been on an extraordinary borrowing spree, sucking in vast quantities of cash to fund lending and acquisitions across Europe and the UK. The result? This tiny country – home to a mere 300,000 people – has somehow created a financial system nine times the size of its GDP.” — Jody Clarke

by Jody Clarke, MoneyWeek

Baltimore — (TFN): If you think the credit crunch is hitting the UK hard, spare a thought for Iceland.

Banks all over the world have spent much of the few years bingeing on cheap money, but Iceland’s taken the whole thing to quite an extreme. Its big players – the likes of Landsbanki and Kaupthing – have been on an extraordinary borrowing spree, sucking in vast quantities of cash to fund lending and acquisitions across Europe and the UK. The result? This tiny country – home to a mere 300,000 people – has somehow created a financial system nine times the size of its GDP.

And a nasty hangover.

Foreign Investment: Iceland’s economy is in a lot of trouble

Now the cheap credit that fueled the binge has all but disappeared the banks – and the economy – are in trouble. The stock market has tanked, inflation has soared and the Icelandic Krona has fallen 26% against the euro this year. House prices, which had doubled since 2001, are now falling.

According to the Icelandic Central Bank, the economy will contract by 2.5% next year and 1.5% in 2010. “We are still likely to see a fairly sharp slowdown in the Icelandic economy in the coming quarters and the most likely scenario is for negative GDP growth in Iceland in 2008 and 2009”, says Lars Christensen, chief analyst at Danske Bank.

Lucky then that the alka seltzer is on its way. Read on to learn what could save Iceland.

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Posted by Jody Clark · Filed Under International Investing 

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