Iceland at the brink of failure

Feb 17, 2009 @ 2:51 pm

By Jeff Benjamin

Iceland’s economic meltdown, fueled by its exposure to foreign debt, could bring the country to the brink of failure, according to research from Hennessee Group LLC.

“Iceland had one of the highest standards of living in the world just a few months ago,” said Charles Gradante, co-founder of the New York-based hedge fund advisory firm.

“Now after experiencing the fastest economic collapse in history, Iceland is suffering from soaring unemployment, as well as double-digit interest rates and inflation.”

According to Hennessee’s research, the primary contributor to the rise and fall of Iceland’s economy was its growth as an international lender.

After privatizing the banking sector in 2000, the country’s banks went from being largely domestic lenders to major international financial intermediaries with foreign assets worth nearly 10 times Iceland’s gross domestic product. This was up from two times GDP in 2003, according to Mr. Gradante.

As the markets seized up, Iceland’s banks started to collapse under the heap of foreign debt they took on over the years, he said.

“Now after experiencing the fastest economic collapse in history, Iceland is suffering from soaring unemployment, as well as double-digit interest rates and inflation,” Mr. Gradante said.

A study of the external debt in relation to GDP in several countries suggests the risk is not limited to Iceland, according to Hennessee’s research.

Like Iceland, Ireland’s external debt, at $1.8 trillion, equals 900% of the country’s $200 billion GDP.

The United Kingdom’s external debt of $10.5 trillion equals 456% of its $2.3 trillion GDP.

Switzerland’s external debt of $1.3 trillion equals 433% of its $300 billion GDP.

Even though it might not feel like it right now, the United States is in better shape with $12.3 trillion worth of external debt and a $14.6 trillion GDP for an 84% debt-to-GDP ratio.

Mr. Gradante said if more countries start suffering fates similar to that of Iceland, there could be a move toward more protectionist policies where countries favor their own industries at the expense of foreigners.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

AXA's Day: Why annuities are returning to favor

Advisers are using annuities more than ever to help drive retirement income. Graham Day of AXA explains why and what's to come for this solution.

Latest news & opinion

Merrill Lynch fined $42 million for misleading customers

In addition to the practice of 'masking' trades, the wirehouse went to extremes to cover up the wrongdoing.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.

Small broker-dealers seek legislative relief from annual audits

Bills introduced in House, Senate would remove PCAOB requirement.

Meet our new 40 Under 40s

For a fifth year, InvestmentNews is proud to shine a spotlight on the amazing accomplishments and potential of top young financial professionals.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print