“Default does not mean death,” as Lex puts it in the FT. Iceland has made a successful return to the debt markets, selling $1bn of dollar-denominated government debt. The sale was twice oversubscribed. “It’s a very strong signal of normalisation of Iceland’s relationship with the international capital markets,” says the International Monetary Fund’s Julie Kozak. Last week’s sale was the first time Iceland had tapped the markets since its banking sector collapsed in 2008, bringing the economy to its knees. The banks had amassed assets worth around ten times the country’s GDP, and their default effectively bankrupted the country. After a sharp decline in GDP – it fell by almost 7% in 2009 – Iceland is bouncing back: GDP grew by 2% quarter-on-quarter in the three months to April 2011.
Iceland’s warm reception could make default in the eurozone more likely, reckons Lex. “If creditors are willing to lend to Iceland after it heavily restructured its banking debts, why not to Ireland?” A sovereign default could also be appealing – Iceland has shown that “the consequences of upsetting creditors are less serious than many (particularly, it seems, the European Central Bank) maintain”.