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Business Of Moody Downgrade Iceland

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Questions:

1.If you were a Moody’s analyst in May of 2008, would you recommend that Moody’s downgrade Iceland’s Aaa sovereign-debt rating? Why? Why not?

2.What is most worrisome in Iceland’s balance of payments? What is most encouraging? Why were investors concerned about Iceland’s net international investment position in May of 2008?

3.Should Iceland seek to join the European Union? Are there other actions the Icelandic government and business community could pursue in order to avoid a crisis of confidence?

 

Answers:

1. Owing to the fact that Moody s Investor services is tasked with the duty to  authoritatively rate  Iceland's  sovereignty in detail by the Icelandic Republic alongside Fitch rating and Standard & Poor's, with the backing of the Central Bank of Iceland, as  Moody analyst I would deliver the true position of the Icelandic sovereign due to the trust placed in the Moody Agency and the significant role played by credit ratings in International finance markets .There's heavy reliance on the credit rating by global investors in determining the borrowing ability and ability to pay thus the need to be truthful in the debt rating(Sedlabanki Islands n. d).Due to the possibility of exploitation due to the high-interest rates, as a moody analyst, I would recommend the downgrade Sovereign debt rating to protect the interests of the Icelandic economy from exploitation and because it’s the right thing to do as an analyst obligated to honor fiduciary duties of the best interest of the client, in this case, Iceland.

Noteworthy, recommending a sovereign debt rating of A Iceland would be the right thing to do because it will help solve the problem because that way the Icelandic government will be aware of its true sovereign debt position and in response implement specific monetary, fiscal and regulatory measures to absolve its high sovereign debt levels as compared to covering it up which leads to further debt levels thus making it hard to clear the debt. The short term and long term sovereign debt rating findings for Iceland are negative thus a confirmed indicator of the downgrade of the sovereign debt of the Icelandic economy thus justifying the downgrade sovereign debt rating by the Moody Ratings. Due to the fact that the financial market of Iceland had been gravely affected by the unsound system of its banking sector, high sovereign debt rates as compared to foreign assets ,low economic activity, budgetary deficit and deficit balance of payment have justified the negative sovereign debt rating by Moody thus the justification of an analyst in downgrading the Icelandic sovereign debt levels. I wouldn’t recommend a downgrade sovereign debt rating unless the same was supported by facts.

 

2.
Noteworthy, Iceland s total external debt has increased profoundly over the years. Particularly, from 72.5bn (USD) $ in 2006 to 113.4bn (USD)$ in the year 2008.In addition, government debts have increased from 3.4bn$ to 3.9bn$ in 2007 -08 respectively (Musachhio 2009).In addition, Iceland foreign asset and liabilities have increased over the years which isn't good for the economy. According to the moody findings, Iceland foreign liabilities have increased from 7.2bn (USD),8.8.9.2 and 9.4bn(USD) between 2004,2005,2006 and 2007 respectively. This increasing trend in foreign liabilities in the Icelandic economy is worrisome and its imperative for the Icelandic government to implement effective measures to curb this trend. The Icelandic balance of payments has recorded large deficit during the last quarter of 2008(Kalkofnevegi and Reykjavik 2009).In addition, the Icelandic banking center is not encouraging. For instance, the Kaupthing Bank, recorded increased liabilities and equity, from 57,786 to 83 481 bn (USD) $ between the years 2006 and 2007 respectively.

However, its impressive that the Icelandic exchange rates went up between 2005 to 2008, January and April respectively.Also, the Icelandic foreign assets have grown over the years. Specifically, foreign assets have grown from 16.3$bn,41.0$bn (USD),71.4$ to 90.2$bn(all USD) in years preceding the banking crisis. This goes to show despite the growing foreign debt figures there’s growth in foreign assets belonging to Iceland thus an encouraging element of the Icelandic economy. Through the net international investment position, a nations economic worth is determined.Primarily, a negative net international investment implies that the country has more foreign liabilities than assets thus it's important for investors to evaluate what country suits their investment needs according to the ranking of the countries at a given point in time (Investopedia 2017).

Typically a positive net investment position value implies nations assets are more than its assets thus implying a good environment for investment. Through this ranking, investors are able to make informed decisions as to the destination of investment. Further, through this ranking, the creditworthiness of a nation is exposed. Typically, net international investment position is a  measure of the country’s economic performance and health which influences foreign investor decision. Usually, countries with positive values on the net international investment position are considered very favorable for foreign investment.

3. According to a Guardian article, s economic interests are better protected outside the European Union. Predominantly, fishing is a major revenue source for Iceland thus the need for it to be controlled by the Icelanders as opposed to foreign ownership which would be inevitable with joining the European Union (AFP In Reykjavik 2015). In addition, despite the fact that during the Crisis, Iceland wasn’t a member of the European Union, other member states of the European Union still felt the effects like Iceland. Specifically, Ireland was badly affected by the global financial crisis as Iceland despite having implemented monetary policies of the European Union. This goes to prove the fact that joining the European Union isn’t  full proof solution to the Financial Crisis. There need for sound domestic fiscal and monetary policy to effectively cushion a country against financial shocks (Thorhallsson and Kirby 2012).

Notably, the Icelandic government could incorporate open policies on investment, nondiscriminatory policies towards globalization, implement restrictive policies in protecting national economic and security interests as last resort measure to create a friendly foreign and domestic investment hub (O.E.C.D. 2009).In addition, there's need for the Icelandic government to partner with private stakeholders to restore investor confidence in the country following the banking crisis in 2008 which led to economic decline. Further, the Icelandic government should implement an effective monetary policy to curb inflationary pressures, stabilize interest and exchange rates which will, in turn, create a friendly investor environment thus restoring investor confidence.

Further, if governments are able to offer incentives for foreign direct investments there will be a more foreign direct investment in Iceland and over time help rebuild trust and confidence of investors. Also, political and economic stability demonstrated by stable inflation, exchange rates and constant growth of economic activity will build investor confidence over time. In addition, there need to stabilize and soundly regulate the Icelandic financial institution's framework to cushion it against future financial shocks both domestic and global. The implementation of low entry and exit market barriers encouraged market competition, collective market research and development will go a long way in building investor confidence.

 

References

AFP in Reykjavik. (2015).Iceland Drops EU Membership Bid: Interests Better served outside’ Union. The Guardian.Com. Available at https://www.theguardian.com/world/2015/mar/12/iceland-drops-european-union-membership-bid#img-1[Accessed 5 Oct 2017]

Investopedia.(2017).Net international Investment Position .Investopedia.Com. Available at https://www.investopedia.com/terms/n/net-international-investment-position-niip.asp[Accessed 5 Oct 2017]

Kalkofnsvegi and Rejkjavik.(2009).Balance of Payments in the Fourth Quarter of 2008 and the External Position. Cb .Is. Available at https://www.cb.is/publications/news/news/2009/03/03/Balance-of-payments-in-the-fourth-quarter-of-2008-and-the-external-position-/[Accessed 5 Oct 2017]

Musacchio, A.(2010).Iceland(A).Harvard Business School. Available at https://www.hbs.edu/faculty/Pages/item.aspx?num=36431[Accessed 5 Oct 2017]

O.E.C.D.(2009).Building Trust and Confidence in International Investment. Organization for economic development and cooperation. Org. Available at https://www.oecd.org/investment/investment-policy/42446942.pdf[Accessed 5 Oct 2017]

Sedlabanki Islands. (N. d).The Republic of  Iceland s Sovereign Credit Rating. Cb.Is .Available at https://www.cb.is/about-the-bank/government-debt-management/the-republic-of-icelands-sovereign-credit-rating/[Accessed 5 Oct 2017]

Thorhallsson, B, and Kriby, P.(2012).Financial Crises In Iceland and Ireland: Does European Union and Euro Membership matter?.Hi. Is. Available at https://ams.hi.is/wp-content/uploads/2014/03/j.1468-5965.2012.02258.x.pdf[Accessed 5 Oct 2017]

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