EVER SINCE HE WROTE a report saying Iceland's economy is in trouble, life hasn't been the same for Carsten Valgreen. Nearly 600 years of history may be partly to blame.

In the past few weeks, the mild-mannered economist from Denmark has burst onto the public consciousness in Iceland. His work has been denounced by Iceland's prime minister as "absurd," he's been blasted by Iceland's Ministry of Finance, and grilled on Iceland's version of "60 Minutes." (Also on that day's show: Silvia Nott, a 22-year-old Icelandic starlet who wears sparkly makeup and feathery costumes.)

All of which has left Mr. Valgreen, chief economist at Denmark's biggest bank, feeling picked on. After all, Iceland's economy does look as if it's in trouble: Its stock market has tumbled nearly 20% in two months, and the currency, the krona, has weakened dramatically.

The anger at Mr. Valgreen may be more historic than personal. For centuries, Denmark has been the top dog among the two Nordic neighbors: Denmark started ruling Iceland in the 14th century, and never really let go. Only in 1944 did Iceland become fully independent. And only in 1997 did Denmark finally return the last of Iceland's prized Norse manuscripts -- an affront dating back to the 18th century.

As a Danish critic of Iceland, Mr. Valgreen was touching a sore spot. "I expect to be hit with tomatoes when I arrive there," the 37-year-old said in early April, just before heading to Reykjavik for a panel discussion on the Icelandic economy.

He wasn't hit with tomatoes, but he was mocked by the nation's largest newspaper in a cartoon that portrayed him as a no-talent hippie artist.

"They're taking it very personally," Mr. Valgreen says.

Iceland's problem is that its tiny economy has been getting whipsawed the past few years. First, foreign money poured into the country to take advantage of its relatively high interest rates, helping fuel a housing boom and rapid economic growth. Then, as interest rates started creeping back up in places like the U.S. and Japan, the foreign funds flooded right back out. It's transformed the tiny nation of 300,000 into a poster boy for how fast-changing global money flows can make or break economies.

Adding to the cross-border strain is the fact that, until its troubles in the past month or so, Iceland was doing much better economically than Denmark. That role reversal means "these old tensions have flared up again," says Kirsten Wolf, a professor of Scandinavian Studies at the University of Wisconsin. "If a German or American made those comments, I don't think it would have been as big of a deal."

Indeed, many other firms, including Merrill Lynch & Co. and Barclays PLC's Barclays Capital, have also issued stinging reports. Analysts around the world have cited Iceland as a cautionary tale for other countries facing similar economic problems, such as excessive short-term debt and rising interest rates. Some analysts believe countries including New Zealand, Australia and Turkey could be at risk.

In Iceland Mr. Valgreen's words had a particular impact. Iceland's stock market tumbled 3.5% right after the release of his report for Danske Bank, which predicted the Icelandic economy could shrink by 5% to 10%, and that Iceland might not merely face recession, but also "a severe financial crisis."

Perhaps most offensive of all to Icelanders was Danske Bank's comparison of their country -- which now has one of the world's highest standards of living -- to much poorer Thailand during the Asian economic crisis in the late 1990s.

"It was almost amusing reading that," says Ludvik Eliasson, the senior economist for Iceland bank Landsbanki, sounding not at all amused. Mr. Eliasson predicts his country will not only avoid a crisis, but that the economy will continue to grow.

Mr. Valgreen hasn't hid from his critics. During his interview on "The Spotlight," a popular Icelandic news magazine, he endured a 10-minute grilling, which started with an accusation: "Your report is rather drastic -- why?"

Iceland and Denmark have had their share of rough spots. Starting in the 16th century, Copenhagen imposed Lutheranism on Iceland and also beheaded Jon Arason, the country's last Catholic bishop. In the 17th century, Denmark demanded exclusive trading rights with Iceland, contributing to economic stagnation that Iceland only recently started to put behind it.

The economic relationship between the two countries has historically been so bitter, it's cited as an example in the recent economics best seller, "Collapse: How Societies Choose to Fail or Succeed." Author Jared Diamond points out that Denmark did try to introduce innovations intended to improve Iceland's economy, such as better fishing nets and new fishing techniques, as well as rope-making and sulfur-mining. But the Danes "found that Icelanders' routine response was `no,' regardless of the potential benefits for the Icelanders," the book states.

Mr. Diamond makes clear that Iceland's economy eventually succeeded by opening to trade and through harnessing geothermal and hydroelectric power.

Over the past several years, the country has liberalized further, scrapping currency controls, privatizing businesses, and increasing trade with the European Union. Recently, Icelandic corporate raiders have bought up large stakes in prominent U.K. retailers. These Icelandic investors have also turned their sights on their former masters, buying up Danish property companies, electronic retail chains and the popular department store Magasin du Nord.

"Seen historically," says Christine Ingebritsen, an associate professor of Scandinavian Studies at the University of Washington, "that's turning the tables on the Danes."

But Iceland's latest preoccupation with Denmark has focused on Mr. Valgreen. Critics charge that the Dane took glee in their country's recent misfortunes. Some also accuse him of getting his facts wrong.

They point to reports from credit-rating agencies Standard & Poor's and Moody's Investors Service that were more confident about the economy's ability to stave off crisis. S&P, for instance, cited stable political institutions and government budget surpluses.

Mr. Eliasson of Landsbanki also points out that Danske Bank acknowledges in its report that it doesn't cover Iceland's economy regularly.

"And there is no reason to doubt that," he says dryly.

(END) Dow Jones Newswires