2012.05.10 06:30:22 WSJE(5/10) Krona Helps Iceland Decouple From EU's Weakest

(From THE WALL STREET JOURNAL EUROPE) By Sarka Halasova Iceland, a small country on Europe's periphery that received an international bailout, has something others in that category don't: access to international bond markets. The country sold a $1 billion bond last week to mainly U.S.-based investors. That Iceland is able to successfully issue its own sovereign bond is a sign that the country is now on the road to recovery even as the European debt crisis keeps countries like Ireland and Portugal locked out of international markets. And unlike these other debt-laden peripheral countries, Iceland retains monetary control over its own economy. While Iceland is geographically bound to Europe, it isn't in the euro zone, instead using the Icelandic krona. Investors link the country to Scandinavia rather than the machinations happening further south. "This transaction is an important milestone for Iceland and is very positive for the Icelandic economy," said Finance Minister Oddny Haroardottir after the deal. It's a long way from the dark days of 2008, when Iceland underwent a financial meltdown that saw the collapse of all three of its major commercial banks and a severe credit crisis afterward. The island nation, with a population of almost 320,000, was forced to ask for help from the International Monetary Fund, which lent it $2.1 billion. As of March, Iceland still owed $1.6 billion on the bailout and is on schedule to repay the full amount by 2016. Since then, Greece, Ireland and Portugal have also received bailouts in order to prevent default. But for them, the crisis is still raging, with investors unwilling to lend to them. What has largely changed Iceland's fortunes is that it has a monetary flexibility and control that the others don't have. The Icelandic krona has weakened sharply against the dollar, beginning 2008 at 61.17 kroner per dollar and ending the year at 123.50 per dollar. On Wednesday, it was at 125.34 kroner per dollar. "Through having that flexibility, Iceland was able to make its exports more competitive," said Cosimo Marasciulo, head of European government bonds and FX at Pioneer Investments. "So when domestic demand was suffering due to high unemployment, for example, it still had control over its exports and was able to offer cheaper goods and services." "This removed the negative effects from the financial shock, and this is clearly what is not happening in Europe right now," he added. Jamie Stuttard, head of international bond portfolio management at Fidelity Investments, said, "They have their own currency, and that means they were able to make that classic emerging market-style currency devaluation that we saw in Asia in 1997, in Latin America throughout the 1980s and to some extend in the early 2000s." Unlike Greece or Portugal, Iceland's unemployment is declining and domestic demand is contributing to growth. While economic output suffered a 7% contraction in 2009, the latest IMF forecast shows gross domestic product expansion of 2.4% this year, largely driven by tourism and the fishing industry. The unemployment rate is expected to fall, from 6.3% in 2012 to 6.0% in 2013. Iceland has benefited from a different policy toward the domestic banking sector. "Both Iceland and Ireland came into their crises with similar thematic problems on their banking sides," Fidelity's Mr Stuttard said. "They had these banks that were enormous and in Iceland's case, they had expanded overseas." But while in 2008 the Irish government stood behind all bank deposits, in Iceland the banks just went bust. "There was pain upfront, but clearly they have emerged from it," he said. Investor sentiment toward Iceland can also be gauged by looking at prices of its credit-default swaps, which are used by investors to insure against default. Iceland's CDS prices are now comparable to those of European countries outside the periphery, like Belgium. (END) Dow Jones Newswires May 10, 2012 00:30 ET (04:30 GMT)