Indicating why Iceland got into trouble

Running head: ADVANCED CORPORATE FINANCE
Advanced Corporate Finance
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1ADVANCED CORPORATE FINANCE
Table of Contents
1. Indicating why Iceland got into trouble:......................................................................................2
2. Describing and explaining the currency fluctuations of the ISK:................................................2
3. Indicating the solution of Iceland’s problems today, while mentioning several options:...........4
References and Bibliography:..........................................................................................................5

2ADVANCED CORPORATE FINANCE
1. Indicating why Iceland got into trouble:
The main problem of Iceland started during the 2006 financial crunch, where the
investors panic has resulted in the liquidity crunch that was faced by banks and other bond
issuers, which increases the interest rate sharply. Iceland after 2001 increased its overall external
debt to support the rising demand from its citizens. The external debt position of Iceland rose to
566%, as both the commercial banks and other sectors increased their debt accumulation to
support their operations. The other major problem was created by the actions of Housing Finance
Fund (HFF), which increased the trouble of Iceland, as the central bank policies were being
ineffective in the region. The HFF that was created in Iceland was mainly holding the progress of
controlling the rising inflation in the country. The HFF mainly financed housing loans for the
citizens and controlled 44% of the Icelandic mortgage market.
In addition, the HFF fueled upswing in the housing prices, as it controlled the loan with
the long-term bonds guaranteed by the government. Moreover, the mortgage bond was charged
by the private banks was at par with HFF. This mainly increased the housing prices, as the
individuals were allowed to borrow against the housing equity, which raised the private
consumption and improved the overall housing prices. Furthermore, there was adequate spread
present to domestic and international trades, which increased availability of the international
credit. Hence, the increment in debt accumulation by the corporations, banks and citizens
increased the problems for the Iceland (Xydias 2017).