Fitch Ratings predicts hard landing for Iceland's economy

Nordic Business Report, June 14, 2006

NORDIC BUSINESS REPORT-14 June 2006-Fitch Ratings predicts hard landing for Iceland's economy(C)1994-2006 M2 COMMUNICATIONS LTD http://www.m2.com

Fitch Ratings on Tuesday (13 June) issued a fresh warning of an increased chance of a hard landing for Iceland's economy.

"The risk of a hard landing has gone upsince February," said Paul Rawkins, sovereign rating analyst at Fitch. "The central bank needs to re-establish its inflation fighting credentials. It needs to ramp up interest rates to get inflation back to the target of 2.5%. We don't see that happening before the end of 2007," Rawkins said in a Bloomberg report on Tuesday.

Rawkins added that Fitch expects the Icelandic krona (ISK) to fall sharply and that the banks' Q2 results will provide important information on their standings. Rawkins added that another important factor is how the banks will manage to refinance themselves.

Iceland's stock market experienced a sharp fall on Tuesday morning and at the end of the day the ICEX-15 decreased by 2.5%. The ISK also decreased by 1.4%.

"The Icelandic government needs to clean up its act and present a credible plan on how to reduce domestic demand," said the director of the University of Iceland's economic department, Tryggvi Thor Herbertsson, to Icelandic Financial News (IFN) on Wednesday (14 June).

Herbertsson was blunt in his comments regarding the Icelandic government and said that "now is Iceland's last chance to show their ability to handle its own monetary policy".

"If we fail to control the inflation and inflation expectations it is abundantly clear that the current monetary policy is obsolete," Herbertsson added.

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