Iceland Bubble

If you’ve made a recent investment in Iceland, you may brace yourself for a grimace.

With a population on a par with a midsize city and a gross domestic
product of around $10.3 billion, or just below that of Rwanda, Iceland
would not seem to be on the radar screen of many financial experts. But
analysts from Merrill Lynch, Danske Bank, Fitch, Standard & Poor’s
and Moody’s Investors Service and economists around the world have
weighed in, some expressing concern, others saying fears of an
Icelandic meltdown are overblown.

 

Nicolas Bouzou, the chief economist of Institut Xerfi, a research
concern in Paris, feels that Iceland could be the "butterfly’s wing"
that sets off serious problems in capital markets around the world.
That is because "many countries have the same macroeconomic
configuration of Iceland," Bouzou said recently by telephone. That
configuration, he said, included a "real estate bubble, very strong
credit expansion and a very high commercial deficit." The same could be
said of New Zealand, Australia and even the United States, he added. If
investors lose money in Iceland, they will pull out of other countries
with similar economic structures, he said.

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