International

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Scandinavia Central Banks Come to Iceland’s Rescue

May 17, 2008 05:05 AM
by findingDulcinea Staff
The central banks of Sweden, Norway and Denmark have offered Iceland a credit-line of 1.5 billion euros to shore up Iceland's troubled currency and economy.

30-Second Summary

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After a decade of solid growth, Iceland's economy recently weakened, and global currency traders placed speculative bets on the fall of Iceland's currency, driving up the cost for Iceland's imports.  The central banks of Norway, Sweden and Denmark have offered a 1.5 billion euro credit-line to Iceland to enable it to shore up its currency and discourage speculation against it.

According to an article in The New York Times in April, the sub-prime mortgage crisis has thwarted Iceland’s “long economic boom.”

Some say Iceland has invested carelessly, although others blame foreign speculators. Either way, Iceland faces “a collapsing currency, rising inflation, double-digit interest rates and predictions of its first recession since 1992.” Many Icelanders believe that hedge funds have been trying to make a profit by sabotaging Iceland’s banks.

Iceland was “built on debt” and critics have compared the country to a “toxic hedge fund,” according to U.K. newspaper The Guardian. Although a small country, Iceland could have a huge impact on world markets if it experiences an economic meltdown.

According to EconomicPrincipals.com, Iceland borrowed large sums of foreign currency “to build electricity capacity at home and invest in European and American markets.” Icelandic entrepreneurs developed “an almost American attitude to acquisitions and risk,” said David Ibison of the Financial Times.

Iceland was already struggling in February 2008. “Its currency is in freefall and the credit markets have dried up,” reported European Pensions and Investment News (EPN). Furthermore, Iceland’s central bank was steadfastly maintaining high interest rates of 13.75 percent.

At the same time, the Organization for Economic Cooperation and Development called on Iceland to restore its economic balance, encouraging cut backs on Iceland’s pricey state-funded health care system.

Headline Links: Scandinavia to the Rescue

Background Links: Tracking Iceland's freefall

Related Topics: Iceland's impressive energy policies

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