Icelandic banks in trouble following Fitch update

18 April 2008

Iceland's banks are under severe financial pressure due to the credit crunch, the New York Times reports.

Previously, the small Scandinavian country's economy has been booming - however, with the global financial crisis have come concerns that the banks have overextended themselves.

Rapid expansion and aggressive acquisitions have led the nation to hold assets worth ten times its GDP - and retain a current accounts deficit of $2.7 billion, or 16 per cent of total economic output.

Therefore, it has proved vulnerable to the general drying-up of liquidity in recent times - with banks such as Landsbanki and Kaupthing Edge bearing the brunt of the pressure.

At the beginning of this month, the nation suffered from a downgrading from ratings agency Fitch - which put Icelandic banks and debt on a negative outlook.

This increased the downwards pressure on the krona, which has dropped 22 per cent against the euro so far in 2008.

Interest rates were raised last week to a record 15.5 per cent by the central bank in an attempt to shore up the economy.

"Investors are worried because the banks have no real access to the markets [because of the credit crunch]," Paul Rawkins at Fitch explained.

"Their next stop will be the government, which would have to bail them out. But the government doesn't have the checkbook to pay for it."

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