* Iceland, Latvia sell debt in return to capital markets
* Iceland finance minister says deal a "milestone"
* Iceland sells $1 bln worth of 5-year debt
* Latvia sells $500 mln worth of 10-year debt
By Daniel Bases
NEW YORK, June 9 (Reuters) - Iceland and Latvia returned to international bond markets on Thursday for the first time since they plunged into crisis during the global liquidity crunch, a sign two small countries are progressing toward recovery.
Iceland sold its first Eurobond for since 2006 and the first since its banking system collapsed in late 2008, ultimately forcing it to take a bailout led by the International Monetary Fund.
Steingrimur Sigfusson, Iceland's finance minister, said the deal was "an important milestone for Iceland. We are encouraged to see the breadth and depth of investor interest," he said in a statement issued after the deal.
Iceland offered a $1 billion five-year debt issue, sold at a discount of 99.484, with a yield of 4.993 percent and a coupon of 4.875 percent. That put it 320 basis points over mid-swaps, the measure of interest between floating and fixed rates. Early price guidance had it higher at 325 basis points.
According the Finance Ministry, the order book was two times oversubscribed, with the majority of the bonds purchased by U.S. and European investors.
In Latvia's case, the Baltic state sold $500 million worth of 10-year debt at a discounted price of 98.1640, bringing a yield of 5.491 percent and a coupon of 5.25 percent. The deal was 237.5 basis points over mid-swaps versus early guidance in the 250 basis points area.
It was Latvia's first international issue since early 2008, just before the financial crisis struck with full force, compelling it to take an IMF-led bailout as well.
Both countries are approaching the end of their bailouts, but had to go through a series of austerity programs to reduce their budget deficits.
Returning to international capital markets is a key milestone in the two countries' recovery from crisis and shows a return of investor confidence.
Iceland still has controls on the flow of foreign currency, but aims gradually to reduce them.
"I must say this is a positive for Iceland. It is something a couple of years ago no one dared dream of so soon after the collapse, while still being under capital controls and still not having completed the IMF program," said Jon Bentsson, senior economist at Islandsbanki in Reykjavik.
Bentsson added that the government's new benchmark debt issuance was crucial for laying the groundwork for other Icelandic banks and businesses to return to international capital markets.
"Now with the interest that is evident from investors in this issue and having raised $1 billion, I guess at reasonable rates, all things considered, the government won't have a cash flow problem in the medium-term for external payments," he said.
Iceland holds the lowest level of investment grade credit rating from Moody's Investors Service at Baa3 and Standard & Poor's at BBB-minus. Fitch has it just one notch lower at BB-plus, junk status.
Latvia's credit rating is investment grade from Moody's at Baa3 and BBB-minus from Fitch, while Standard & Poor's has it one notch lower at BB-plus.
Latvia's economic output plunged 18 percent in 2009, the worst drop in the European Union, but it is now back on the growth path.
Latvia's currency is pegged to the euro and the country wants eventually to adopt the euro, with a target of 2014.
The lead managers for Iceland's debt issue were Barclays, Citi and UBS.
Latvia's deal was lead-managed by Credit Suisse and Citi. (Reporting by Daniel Bases, additional reporting by Patrick Lannin and Mia Shanley in Stockholm; Editing by Dan Grebler)