Hard as it is to believe, Iceland has recovered sufficiently by reducing both its massive deficits and its outsized financial services industry. As a consequence, Fitch's has just rehabilitated Iceland's credit rating to investment grade:
As the first country to suffer the full force of the global financial crisis, Iceland successfully completed a three-year IMF-supported rescue programme in August 2011. Despite some setbacks along the way, the programme laid the foundations for renewed access to international capital markets in mid-2011 and an encouraging rebound in economic growth to 3% for 2011 as a whole. Flexible labour and product markets and a floating exchange rate have facilitated the correction of external imbalances and contained the rise in unemployment, while the financial system has shrunk to one fifth of its former size.And, wonder of wonders, capital controls have also been implemented that have helped Iceland:
Iceland has been among the front runners on fiscal consolidation in advanced economies: the primary deficit has contracted from 6.5% of GDP in 2009 to 0.5% in 2011 and Iceland appears to be on track to attain primary fiscal surpluses from 2012 and headline surpluses from 2014.
Fitch believes that gross general government debt may have peaked at around 100% of GDP in 2011 (excluding potential Icesave liabilities); net debt is significantly lower at around 65% of GDP, reflecting appreciable deposits at the Central Bank (CBI).
Capital controls continue to block repatriation of USD3bn-USD4bn of non-resident investment in ISK-denominated public debt and deposit instruments. Fitch acknowledges that Iceland's exit from capital controls promises to be lengthy, given the underlying risks to macroeconomic stability, fiscal financing and the newly restructured commercial banks' deposit base.While the American debt lovers continue to pile up the IOUs, it seems saner nations understand that there is no such thing as a free lunch. As the US external deficit explodes upwards together with its fiscal one, we've seen their movie before. Fortunately, Iceland and a few others do not care for a second showing. For all their shortcomings, credit rating agencies have the general directions of Icelandic and US economies sussed out.