The Republic of Iceland's prosperity and ability to react to economic challenges, as witnessed by the swift and nonrecessionary reduction of external imbalances in 2001 and 2002, endow the country with an eminent capacity to absorb economic shocks. This capacity is further supported by a consensual and proactive political culture. Iceland has also made important progress in consolidating its public finances and is expected to continue on this course. The current weakening of the budget position is broadly due to cyclical factors, but broad balance will be sustained through the economic downturn. Nevertheless, private sector external debt has rapidly risen to levels well above those of Iceland's peers in the 'A' rating category. Despite a faster-than-expected decline in the current
