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International Business, 8th Edition by Michael H. Moffett, Iikka A. Ronkainen, Michael Czinkota

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PART 2 CASE 1

ICELAND 2006—A SMALL COUNTRY IN A GLOBAL CAPITAL MARKET

More than almost anything, Icelanders like a soak in hot water. Reykjavik has more thermal spas per head than any other city in the world. But lately, the North Atlantic nation has been feeling more heat than it bargained for. On February 1st Fitch, a rating agency, cut its outlook on Icelandic sovereign debt to negative from stable, drawing attention to a current-account deficit that ballooned to 15% of GDP in 2005 and fast-raising foreign debt. 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.

“Storm in a Hot Tub,” The Economist, March 30, 2006

The last one or two years had been something of a shock to the Icelandic people. Long used to being ignored in the world, Iceland's economic situation and its interest rates—some of the highest in the world recently—had suddenly garnered much international attention. Now, in the spring of 2006, Iceland's central bank and governmental monetary authorities were wondering whether they were seeing the dark underside of globalization and economic growth. Is this what it felt like to be a small country in a global market?

OVERHEATING

Iceland's economy had been growing at record rates in recent years. Gross domestic product had grown at just over 8 percent in 2004, 6 percent ...

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