A Debt-Free State; Isolated and without Credit

Abstract

In early 2003, the three Icelandic banks had inherited a good credit rating from the virtually debt-free Icelandic state (4.4 percent of GDP net debt), which allowed their borrowing to go into high gear.¹ By early 2008, however, the Icelandic state was inheriting the bad credit ratings of the banks.² In just three months, the credit default swap (CDS) rate on Icelandic sovereign debt climbed twenty-fold, from 11 basis points in November 2007 to above 200 in February 2008 (Figure 15.1).