Economic Assignment for MBA

This assignment analyzes Iceland's sovereign debt rating from the perspective of a Moody's analyst in 2008. It discusses the implications of downgrading the rating, the concerns regarding Iceland's balance of payments, and the potential benefits and drawbacks of joining the European Union. The assignment emphasizes the importance of accurate credit ratings and the need for effective economic policies to restore investor confidence.

ECONOMIC ASSIGNMENT MBA
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If you were a Moody’s analyst in May of 2008, would you recommend that Moody’s
downgrade Iceland’s Aaa sovereign-debt rating? Why? Why not?
Owing to the fact that Moody s Investor services is tasked with the duty to authoritatively rate
Iceland's sovereignty in detail by the Icelandic Republic alongside Fitch rating and Standard &
Poor's, with the backing of the Central Bank of Iceland, as Moody analyst I would deliver the
true position of the Icelandic sovereign due to the trust placed in the Moody Agency and the
significant role played by credit ratings in International finance markets .There's heavy reliance
on the credit rating by global investors in determining the borrowing ability and ability to pay
thus the need to be truthful in the debt rating(Sedlabanki Islands n. d).Due to the possibility of
exploitation due to the high-interest rates, as a moody analyst, I would recommend the
downgrade Sovereign debt rating to protect the interests of the Icelandic economy from
exploitation and because it’s the right thing to do as an analyst obligated to honor fiduciary
duties of the best interest of the client, in this case, Iceland.
Noteworthy, recommending a sovereign debt rating of A Iceland would be the right thing to
do because it will help solve the problem because that way the Icelandic government will be
aware of its true sovereign debt position and in response implement specific monetary, fiscal and
regulatory measures to absolve its high sovereign debt levels as compared to covering it up
which leads to further debt levels thus making it hard to clear the debt. The short term and long
term sovereign debt rating findings for Iceland are negative thus a confirmed indicator of the
downgrade of the sovereign debt of the Icelandic economy thus justifying the downgrade
sovereign debt rating by the Moody Ratings. Due to the fact that the financial market of Iceland

had been gravely affected by the unsound system of its banking sector, high sovereign debt rates
as compared to foreign assets ,low economic activity, budgetary deficit and deficit balance of
payment have justified the negative sovereign debt rating by Moody thus the justification of an
analyst in downgrading the Icelandic sovereign debt levels. I wouldn’t recommend a downgrade
sovereign debt rating unless the same was supported by facts.

What is most worrisome in Iceland’s balance of payments? What is most encouraging?
Why were investors concerned about Iceland’s net international investment position in
May of 2008?
Noteworthy, Iceland s total external debt has increased profoundly over the years. Particularly,
from 72.5bn (USD) $ in 2006 to 113.4bn (USD)$ in the year 2008.In addition, government debts
have increased from 3.4bn$ to 3.9bn$ in 2007 -08 respectively (Musachhio 2009).In addition,
Iceland foreign asset and liabilities have increased over the years which isn't good for the
economy. According to the moody findings, Iceland foreign liabilities have increased from 7.2bn
(USD),8.8.9.2 and 9.4bn(USD) between 2004,2005,2006 and 2007 respectively. This increasing
trend in foreign liabilities in the Icelandic economy is worrisome and its imperative for the
Icelandic government to implement effective measures to curb this trend. The Icelandic balance
of payments has recorded large deficit during the last quarter of 2008(Kalkofnevegi and
Reykjavik 2009).In addition, the Icelandic banking center is not encouraging. For instance, the
Kaupthing Bank, recorded increased liabilities and equity, from 57,786 to 83 481 bn (USD) $
between the years 2006 and 2007 respectively.
However, its impressive that the Icelandic exchange rates went up between 2005 to 2008,
January and April respectively.Also, the Icelandic foreign assets have grown over the years.
Specifically, foreign assets have grown from 16.3$bn,41.0$bn (USD),71.4$ to 90.2$bn(all USD)
in years preceding the banking crisis. This goes to show despite the growing foreign debt figures
there’s growth in foreign assets belonging to Iceland thus an encouraging element of the
Icelandic economy. Through the net international investment position, a nations economic worth

is determined.Primarily, a negative net international investment implies that the country has
more foreign liabilities than assets thus it's important for investors to evaluate what country suits
their investment needs according to the ranking of the countries at a given point in time
(Investopedia 2017).
Typically a positive net investment position value implies nations assets are more than its
assets thus implying a good environment for investment. Through this ranking, investors are able
to make informed decisions as to the destination of investment. Further, through this ranking, the
creditworthiness of a nation is exposed. Typically, net international investment position is a
measure of the country’s economic performance and health which influences foreign investor
decision. Usually, countries with positive values on the net international investment position are
considered very favorable for foreign investment.

3. Should Iceland seek to join the ******European Union? Are there other actions the
Icelandic government and business community could pursue in order to avoid a crisis of
confidence?
According to a Guardian article, s economic interests are better protected outside the
European Union. Predominantly, fishing is a major revenue source for Iceland thus the need for
it to be controlled by the Icelanders as opposed to foreign ownership which would be inevitable
with joining the European Union (AFP In Reykjavik 2015). In addition, despite the fact that
during the Crisis, Iceland wasn’t a member of the European Union, other member states of the
European Union still felt the effects like Iceland. Specifically, Ireland was badly affected by the
global financial crisis as Iceland despite having implemented monetary policies of the European
Union. This goes to prove the fact that joining the European Union isn’t full proof solution to
the Financial Crisis. There need for sound domestic fiscal and monetary policy to effectively
cushion a country against financial shocks (Thorhallsson and Kirby 2012).
Notably, the Icelandic government could incorporate open policies on investment,
nondiscriminatory policies towards globalization, implement restrictive policies in protecting
national economic and security interests as last resort measure to create a friendly foreign and
domestic investment hub (O.E.C.D. 2009).In addition, there's need for the Icelandic government
to partner with private stakeholders to restore investor confidence in the country following the
banking crisis in 2008 which led to economic decline. Further, the Icelandic government should
implement an effective monetary policy to curb inflationary pressures, stabilize interest and
exchange rates which will, in turn, create a friendly investor environment thus restoring investor
confidence.

Further, if governments are able to offer incentives for foreign direct investments there will
be a more foreign direct investment in Iceland and over time help rebuild trust and confidence of
investors. Also, political and economic stability demonstrated by stable inflation, exchange rates
and constant growth of economic activity will build investor confidence over time. In addition,
there need to stabilize and soundly regulate the Icelandic financial institution's framework to
cushion it against future financial shocks both domestic and global. The implementation of low
entry and exit market barriers encouraged market competition, collective market research and
development will go a long way in building investor confidence.

References
AFP in Reykjavik. (2015).Iceland Drops EU Membership Bid: Interests Better served outside’
Union. The Guardian.Com. Available at
https://www.theguardian.com/world/2015/mar/12/iceland-drops-european-union-membership-
bid#img-1[Accessed 5 Oct 2017]
Investopedia.(2017).Net international Investment Position .Investopedia.Com. Available at
http://www.investopedia.com/terms/n/net-international-investment-position-niip.asp[Accessed 5
Oct 2017]
Kalkofnsvegi and Rejkjavik.(2009).Balance of Payments in the Fourth Quarter of 2008 and the
External Position. Cb .Is. Available at
https://www.cb.is/publications/news/news/2009/03/03/Balance-of-payments-in-the-fourth-
quarter-of-2008-and-the-external-position-/[Accessed 5 Oct 2017]
Musacchio, A.(2010).Iceland(A).Harvard Business School. Available at
http://www.hbs.edu/faculty/Pages/item.aspx?num=36431[Accessed 5 Oct 2017]
O.E.C.D.(2009).Building Trust and Confidence in International Investment. Organization for
economic development and cooperation. Org. Available at
https://www.oecd.org/investment/investment-policy/42446942.pdf[Accessed 5 Oct 2017]
Sedlabanki Islands. (N. d).The Republic of Iceland s Sovereign Credit Rating. Cb.Is .Available
at https://www.cb.is/about-the-bank/government-debt-management/the-republic-of-icelands-
sovereign-credit-rating/[Accessed 5 Oct 2017]

Thorhallsson, B, and Kriby, P.(2012).Financial Crises In Iceland and Ireland: Does European
Union and Euro Membership matter?.Hi. Is. Available at
http://ams.hi.is/wp-content/uploads/2014/03/j.1468-5965.2012.02258.x.pdf[Accessed 5 Oct
2017]