ICELAND – The Icelandic Finance Ministry has taken issue with claims that domestic pension funds’ behaviour is having a negative impact on the economy.

Ratings agency Standard & Poor’s – which downgraded Iceland from stable to negative amid fears of an economic “hard landing” – said Iceland’s external financing needs are among the highest in the world.

This has been driven by very high levels of external debt and large current account deficits, exacerbated by foreign direct investment and portfolio equity outflows, said S&P.

According to S&P analyst Moritz Kraemer, “They pension_funds are exacerbating the external borrowing requirements, the external indebtedness.

“Not only does the nation as a whole need to find financing for the current account deficit, but also these equity flows leaving the country need to be financed somehow.”

Icelandic funds have loaded up on overseas assets in recent times.

But according to Thorsteinn Thorgeirsson, director general of the economics department at the Finance Ministry, the most recent investment flow data (until March 2006) shows that pension schemes have not played a major role in changes to the country’s exchange rate.

“Rather, the increase in foreign holdings of pension fund assets registered in March 2006 was mostly due to a revaluation effect of foreign currency amounts in the krona.

“The pension funds are therefore not having a big effect and their actions are by and large seen to be positive.”

According to the S&P report, there is a “growing possibility of a hard landing for Iceland’s credit and investment boom that started in 2004, as pent-up economic balances begin to unwind.”

However, Iceland’s finance minister Arni Mathiesen recently stated that the risk of a hard landing is “minimal”. Comprehensive structural reforms over the past 15 years, and a flexible and sound economy, have improved the chances for a soft landing instead.

In March this year IPE report that local funds had shrugged off the turbulence that was affecting domestic financial markets.