The ratings on Iceland are supported by its stable and flexible political institutions, high level of prosperity, and strong long-term economic growth prospects. In the near term, however, the Icelandic economy faces a period of stagnation and the potential risk of a hard landing, as the macroeconomic imbalances built up in the credit and investment boom in the past two years unwind. Fiscal surpluses could not completely offset excessive domestic demand during the period of large-scale investment projects and rapidly expanding bank credit in 2003-2006. Accelerating wage growth and other inflationary pressures have prompted the Central Bank of Iceland to hike interest rates, to their current level of 14.00%. Although the economy is showing signs of cooling, the possible depreciation
