Iceland's financial headache won't spread

money.jpg This is at least the answer we get out of The Economist. Iceland has certainly been overtly in the headlines recently because of the countries´ wobbly currency and large current account deficit; see my two posts here and here as well as Nouriel Roubini and Brad Setser. Analysts are using Iceland as a case example of how emerging markets' currencies and markets are under threat as carry trading begins to unwind because of (expected) rate hikes by the three major central banks (BOJ, ECB and the Fed). See also this report by Danske Bank.

Using Iceland as a case study to show a general trend is one but claiming that a crisis in Iceland will spread is another which is what The Economist also brings to our attention;

"With only 300,000 people and an economy one-third the size of Luxembourg's, Iceland's troubles may sound like the fabled headline, “Small earthquake: not many dead.” But dire warnings of contagion have flourished out of all proportion to the country's size."

The narrative of Iceland as moving towards a crisis like Asia in 1997 is yet to be either proven or disclaimed, but I do think that the current economic dynamics of Iceland are worht watching with some concern. On the more broad question about the Icelandic crisis spreading to other economies I would say that The Economist is probably right but that does not make Iceland any less interesting at the moment.