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With Sky-High Rates, Is Iceland Worth a Gamble?

Antonia Oprita, |Associate Web Producer
Tuesday, 15 Apr 2008 | 2:52 AM ET

Investors looking for high returns and not afraid of volatility may want to look to Iceland for opportunities as the country starts to rebound from a sharp correction.

The Icelandic crown lost about 25 percent of its value from the beginning of the year, while the stock exchange fell by around 40 percent from a peak reached in July, as foreign investors fled from risky markets.

But the correction is nearly over and the small Nordic country's economy is robust, analysts told CNBC.com.

Last week the central bank hiked interest rates by half a percentage point to 15.5 percent, after a raise of 1.25 points in March, making Iceland the country with the highest interest rates in Europe.

"We still see appreciation from the current point. But the next few weeks will be very volatile for the currency," Almar Gudmundsson, Head of Nordic Research at Icelandic bank Glitnir, told CNBC.com.

A slowing economy and uncertainties for the global credit market are the underlying reasons for the predicted volatility, but Gudmundsson predicts the currency will appreciate by between 5 percent and 10 percent by the end of the year.

Negative Outlook, Safer than Peers

Credit rating agencies recently changed their outlook on Iceland to negative, citing the rapid build-up of external debt -- which currently stands at about 120 percent of gross domestic product -- and the strong credit growth.

But, as Moody's pointed out in a recent report, "the government compares very favourably against its Aaa- and Aa-rated peers on many important credit rating metrics."

Iceland's strengths are its fully-funded pension system, high GDP per capita and highly-skilled, young workforce, Gudmundsson said.

In addition, the crown's fall contributes to reduce the current account deficit, which has already narrowed from a whopping 25 percent of GDP in 2006 to 16 percent last year. Gudmundsson said the gap will be no more than 6 percent of GDP in two years.

And, once the credit turmoil settles, Iceland's interest rate differential may turn it again into the market's darling.

"Given our forecast, I think it should be appealing for foreign investors to trade Icelandic interest rates," Gudmundsson said.

Contact Europe: Economy

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