The ratings on the Republic of Iceland are supported by its stable and flexible political institutions, high level of prosperity, and strong long-term economic growth prospects. The ratings are constrained, however, by very weak external liquidity and a high external debt burden. The Icelandic economy is likely to stagnate in 2007, but to recover gradually to an annual growth rate of about 3% by 2010. Iceland is expected enter this period of a weakening economy with a low general government debt burden of 23% of GDP in 2007, one-half the level of five years earlier. The possibility of a significant economic contraction remains real, however. In this case, there will be increasing pressure on both budget balances and contingent liabilities
