UPDATE 1-Fitch upgrades Iceland to BBB, outlook stable

Thu Feb 14, 2013 4:53pm EST

NEW YORK Feb 14 (Reuters) - Fitch raised Iceland's sovereign credit rating one notch to BBB on Thursday, citing the country's "impressive" progress in recovering from the 2008-09 financial crisis.

The outlook on the credit is stable.

The agency cited continued growth in Iceland's economy, with budget consolidation on track and a drop in the ratio of public debt to the economy, as well as other signs of improvement.

Moody's Investors Service last week raised the country's sovereign outlook to stable from negative. Moody's rates the country Baa3.

Standard & Poor's rates the country BBB-minus with a stable outlook.

"The Icelandic economy has displayed the ability to adjust and recover at a time when many countries with close links to Europe have stumbled in the face of adverse developments in the eurozone," Fitch said in its statement.

The firm added that it expects to see debt as a portion of gross domestic product decline to 69 percent by 2021, down from an estimated 96 percent of GDP in 2012.

Earlier this week, Iceland's central bank governor Mar Budmundsson said the bank would intervene to ensure as little depreciation as possible in its weakening currency due to inflation concerns but will draw no line in the sand for the crown's value.

Fitch's upgrade, pushing it further into investment grade territory, is indicative of an economy making steady progress after getting crushed by the 2008-09 banking crisis.

The economy has bounced back better than many European economies after a huge fall in the crown, the imposition of capital controls and avoiding expensive bank rescues.

The central bank forecasts 2012 gross domestic product growth of 2.2 percent rather than 2.5 percent expected in November and for 2.1 percent this year rather than 3 percent.

Fitch said Iceland's exit from capital controls will be a lengthy process, given the underlying risks to macroeconomic stability, fiscal financing and the newly restructured commercial banks' deposit base.

"However, the longer capital controls remain in place, the greater the risk that they will slow recovery and potentially lead to asset price bubbles in other areas of the economy," Fitch said.

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