Reply #42: Iceland cools, raising worry of wider chill

[54anickel]

http://www.iht.com/articles/2006/04/14/business/wbiceland.php

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But Iceland's ascent has hit a speed bump in the past several months. Concerned that the economy has overheated, or reacting to macroeconomic changes in other countries, some global investors, including hedge funds, have withdrawn money from Icelandic markets. This pullback has caused the main stock index, the ICEX15, to fall 18 percent, and the currency, the krona, to weaken.

These declines, some analysts say, run the risk of driving other investors away, creating a downward spiral that could have global repercussions. If nothing else, the analysts say, Iceland's own economy could be in for a rough patch, serving as a cautionary tale for other emerging markets.

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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.

It is always a small event, Bouzou said, that triggers what he called "systematic crashes." In this case, he said, the event could be a further decline in Iceland's currency or stock market, or the country's inability to pay off some of its debt - which some critics believe could be a possibility.

The concern is "not that Iceland directly causes other problems," said Brad Setser, a senior economist with RGE Monitor, a research firm in New York. Instead, Iceland could remind investors that "things can turn around" in countries with a big current account deficit, a hot housing market and an overvalued currency.

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