The ratings on the Republic of Iceland reflect the mounting economic policy challenges facing the sovereign, largely related to pressure on Iceland's external funding for the nation's commercial banks. Iceland's banks rely on wholesale funding, particularly from overseas, and higher funding costs are hurting their profitability and growth. Due in part to banks' financing of their own rapid expansion abroad as well as that of several local entrepreneurs, net external debt of the financial system has risen to 362% of current account receipts (CARs) in 2007, from 161% in 2003, and domestic credit to GDP has risen to over 384% from 130% during the same period. These are among the highest ratios for rated sovereigns. The banks' higher funding costs,
