Money and Metals

The International Herald Tribune has this update on the situation in Iceland. "This tiny windswept island nation of 300,000 people has undergone one of the fastest, fizziest economic transformations in the world in recent years, one that is on par with the expansion enjoyed by many of the world's fastest-growing emerging markets."

"Thanks to the opening of its financial markets and a flow of money from international investors lured by its high interest rates, Iceland has quickly morphed into a European mini-titan. The local stock market, created in 1985, has been the best performing Western market for four years in a row."

"But Iceland's ascent has hit a speed bump in the past several months. Concerned that the economy has overheated, and anxious to cash in on their gains, some global investors, including hedge funds, have withdrawn money from Icelandic markets. This pullback has caused the main stock index to fall 18 percent, and the currency, the krona, to weaken. Analysts and investors have weighed in, seeing a cautionary tale for other fast-growing emerging markets as Iceland's economic miracle melts away."

"The concern is 'not that Iceland directly causes other problems,' said economist Brad Setser. 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."

"'Many countries have the same macroeconomic configuration of Iceland,' economist Nicolas Bouzou said. That configuration, he said, includes 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. It is always a small event, Bouzou said, that triggers what he called 'systematic crashes.'"

"Iceland's harshest critics have come from Denmark, which for centuries held it as a colony until Iceland declared independence in 1944.

"'Iceland looks worse on almost all measures than Thailand did before its crisis in 1997, and only moderately more healthy than Turkey before its 2001 crisis,' Danske Bank analysts wrote in a report last month."

"Lars Christensen, one of the authors of the Danske report, briskly summarized his thesis. 'Markets are increasingly focused on the financing of imbalances,' he said, because 'global liquidity is getting tighter.' And the countries with the biggest imbalances, he said, are Hungary, New Zealand and Iceland."

"'I don't think Iceland is doomed,' he said. 'With every good party there is a hangover.' He pleaded with Iceland's banks to pull back on lending, the better to 'be able to start another party.'"