ome hedge funds and other global investors in the last several months have been concerned that the economy has overheated, and so they have withdrawn money from Icelandic markets. This pullback has caused the main stock index, the Icex 15, to fall 18 percent, and the currency, the krona, to weaken by about the same amount.
These declines, some analysts say, run the risk of driving away other investors, who had been lured by Iceland's attractive interest rates. This could prompt a downward spiral with larger 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.
With a population on a par with a midsize American 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 many economists have weighed in with concern. Others say 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 ripples in capital markets elsewhere in the world.
Mr. Bouzou said that "many countries have the same macroeconomic configuration of Iceland," and if investors lose a great deal more money in Iceland, they could also pull out of other countries with similar economic structures. 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 said.
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