The housing crisis in the US is expected to lead to a more limited access to loans internationally, something that Standard & Poor, a financial research company based in the US, says will hit Latvia and Iceland the hardest.
Standard & Poor recently produced a report detailing evidence of over-expansion in the Icelandic economy. The phenomenon has been accompanied by a high demand for loan capital in the country and a boom in property prices.
The policy rate of the Icelandic Central Bank currently stands at 13.3 per cent but Standard & Poor’s report predicts that the bank may be forced to rise the rate following recent takeovers by local banks which resulted in large debts.
Not everyone agrees with the report, however. The director of the analysis division at Landsbanki Bank, Bjorn Runar Gudmundsson, said that the economy is fully recovered from disturbances suffered in March 2006 and is fully prepared to handle new problems.
In March last year there was some negative discussion about financial institutions in Iceland, during which time Gudmundsson said many problems were identified and solved. “The banks have protected themselves against the fluctuating currency of the krona and the state is better prepared (than in March 2006),” he said.
“We also have to consider that the banks here do not have much to do with the disturbance on the American mortgage market. Overall, we are better prepared now than during the last phase of disturbance,” Gudmundsson concluded.
The report by Standard & Poor is called the Liquidity Vulnerability Index and is designed to gauge the vulnerability of less developed markets to negative market conditions. The report also predicted that Bulgaria and Turkey could fare badly if tight liquidity continues.