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Iceland's economy shrinks further

7 December 09 15:12 GMT

Iceland's recession deepened in the third quarter as figures showed output plunging at the fastest pace on record.

Its economy contracted 5.7% in the July to September period compared to the previous three months. On an annual basis the economy shrank by 7.2%.

The country's financial system collapsed after last year's credit crunch because its banks had lent more money than the country had in capital.

The government had to turn to the International Monetary Fund for help.

European countries also lent billions of dollar to help it survive the crisis.

When the three biggest banks folded a year ago they owed more than $60bn to foreign lenders.

The Icelandic krona has also plunged - losing around half its value.

"Domestic demand in Iceland is very depressed because there is still no fully functioning financial system," said analyst Petter Sandgren from SEB bank.

"So possibly, the domestic side will continue to have quite a tough time."

Experts predict Iceland's economy will continue to shrink next year.

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