Iceland at the brink of failure

By Jeff Benjamin

Feb 17, 2009 @ 2:51 pm (Updated 2:52 pm) EST

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.