Case Study: Iceland's Economy, EU, and Financial Crisis Analysis

This economic case study examines Iceland's economic performance, focusing on the period before and after the 2008 Global Financial Crisis. It analyzes the country's financial sector, highlighting its high leverage and the impact of the crisis on its sovereign credit rating. The study delves into Iceland's balance of payments, noting the negative trends in the current and capital accounts. Furthermore, it explores the implications of Iceland potentially joining the European Union, discussing both the advantages and disadvantages. The analysis incorporates Moody’s ratings and provides a comprehensive overview of Iceland's economic challenges and prospects, supported by relevant references.

Running head: ECONOMIC CASE STUDY
Economic Case Study
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Introduction
The essay tries to discuss the performance of the economy of Iceland and the dynamics in the
sovereign credits and overall balance of payments of the same, pre and post the Global Economic
Crisis of 2008. In the context of the same it tries to take into account the sovereign credit rating
of the country (Taking Moody’s ratings in this case) and analyze the relevance of the dynamics
in the credit rating, the positive and negative sides of the economy. It also tries to discuss the
problems and prospects of the country joining the European Union (Afonso, Furceri and Gomes
2012).
Iceland Economy: Financial Sector
The economy of Iceland had proved to be one of the consistently stable economy in the world
before the advent of the Global Financial Crisis of 2008 and the country was experiencing
immense financial credibility and profitability in the financial sector. The country, thus, also
enjoyed high sovereign credit rating which facilitated both domestic as well as international
investment (Hart-Landsberg 2013).
Broadly leveraged financial sector
If the financial sector of any country is highly leveraged then that implies that there remains a
heavy tendency of financing expenditures by borrowing, by the households as well as the
investors, which in its turn keeps on increasing both the internal as well as the external debt
burden of the country. Iceland, before the occurrence of the financial crisis shows the same trend
as the households and the banking and the private financial companies of the country showed a
tendency of borrowing extensively from the international market (Gunnarsson, Bjarnadóttir and
Ríkardsson). As can be seen from the data evidences, the external debt of the economy was

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549% of the total Gross Domestic Product of Iceland and the outstanding debt of the banks of the
country was 400% of the GDP.
Post Global Financial Crisis
The Global Economic Crisis occurred in the international economic scenario in the year 2008,
with the huge deregulation of the banking sector and the withering out of the housing sector
boom, which started in the USA. The crisis percolated to all the major global economies of the
world, including the European countries too and Iceland was no exceptions. The highly
leveraged financial sector of the economy and the huge outstanding debt of the country created
even acute problem for the financial sector of the economy (Bergmann 2014).
Balance of Payments of Iceland
One of the most worrying factors in the economy of Iceland are the several aspects in the balance
of payments of the country, which has led to a continuous negative trend in the balance of
payment of the country. The Current Account of the same kept on continually decreasing from a
value of -555 in 1998 to as low as -4090 in 2006, which was also accompanied by a continuous
decrease in the balance of payments of the expenditures of the country, which also decreased
from -298 to -5528 within the time span of 1998 to 2007. Much of this was due to the presence
of the highly leveraged financial sector and the consequent continuous increase in the debt
burden of the country. The import balance also kept on decreasing continually and also a huge
fall in the capital account balance of Iceland which completely outdid the positive trend, with the
numbers decreasing from 7084 to -1981 in 2007 (Khvostova et al. 2013).
All of these factors collectively, contributed to the highly worrisome financial sector of the
country with the in set of the Global Financial Crisis in 2008. This in other terms means that the

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credit rating of the country also ideally should have decreased significantly as the investment
position of the country became significantly inferior and the domestic as well as international
investment decreased due to the speculations of the investors and the liabilities of the country
also increased.
Iceland and European Union
The European Union is a political as well as an economic conglomeration of 28 European
countries. This was formed with the objective to create a single internal market and a common
currency situation. If Iceland joins the European Union, then there may be both positive or
negative implications of the same on the country (Clark and Jones 2012). On one hand, as
Iceland is a small country, therefore, it becomes taxing and costly on part of the country to
maintain a separate currency and if it becomes a part of the EU then it will not have to make
reforms and can enjoy the advantages of being a member of EU like that of a common currency.
On the other hand, the country will lose its sovereignty and it will also need to contribute to the
funds as it is a small country.

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References
Afonso, A., Furceri, D. and Gomes, P., 2012. Sovereign credit ratings and financial markets
linkages: application to European data. Journal of International Money and Finance, 31(3),
pp.606-638.
Bergmann, E., 2014. Iceland and the international financial crisis: Boom, bust and recovery.
Springer.
Clark, J. and Jones, A., 2012. After ‘the collapse’: Strategic selectivity, Icelandic state elites and
the management of European Union accession. Political Geography, 31(2), pp.64-72.
Gunnarsson, H.H., Bjarnadóttir, R. and Ríkardsson, R.B., The outlook for Iceland’s external debt
and payment flows.
Hart-Landsberg, M., 2013. Lessons from Iceland: Capitalism, crisis, and resistance. Monthly
Review, 65(5), p.26.
Khvostova, L., Larin, A., Novak, A. and Shulgin, A., 2013. The Balance of Payment Dynamics
in the period of Crises. The Macro theme Review, 2(7), pp.82-103.