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TEXT-Fitch raises Iceland to 'BBB-', investment grade
February 17, 2012 / 3:55 PM / in 6 years

TEXT-Fitch raises Iceland to 'BBB-', investment grade

Feb 17 - Fitch Ratings has upgraded Iceland's Long-term foreign
currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+' and affirmed its
Long-term local currency IDR at 'BBB+'. Its Short-term foreign currency IDR has
also been upgraded to 'F3' from 'B' and its Country Ceiling to 'BBB-' from
'BB+'. The Outlooks on the Long-term ratings are Stable.	
	
'The restoration of Iceland's Long-term foreign currency rating to investment
grade reflects the progress that has been made in restoring macroeconomic
stability, pushing ahead with structural reform and rebuilding sovereign
creditworthiness since the 2008 banking and currency crisis," says Paul Rawkins,
Senior Director in Fitch's Sovereign Rating Group.	
	
"Iceland has successfully exited its IMF programme and gained renewed access to
international capital markets. A promising economic recovery is underway,
financial sector restructuring is well-advanced, while public debt/GDP appears
to be close to peaking on the back of a robust fiscal consolidation programme"
added Rawkins.	
	
As the first country to suffer the full force of the global financial crisis,
Iceland successfully completed a three-year IMF-supported rescue programme in
August 2011. Despite some setbacks along the way, the programme laid the
foundations for renewed access to international capital markets in mid-2011 and
an encouraging rebound in economic growth to 3% for 2011 as a whole. Flexible
labour and product markets and a floating exchange rate have facilitated the
correction of external imbalances and contained the rise in unemployment, while
the financial system has shrunk to one fifth of its former size.	
	
Iceland has been among the front runners on fiscal consolidation in advanced
economies: the primary deficit has contracted from 6.5% of GDP in 2009 to 0.5%
in 2011 and Iceland appears to be on track to attain primary fiscal surpluses
from 2012 and headline surpluses from 2014.	
	
Fitch believes that gross general government debt may have peaked at around 100%
of GDP in 2011 (excluding potential Icesave liabilities); net debt is
significantly lower at around 65% of GDP, reflecting appreciable deposits at the
Central Bank (CBI). Barring further shocks, Iceland should see a sustained
reduction in its public debt/GDP ratio from 2012, assuming economic recovery
continues and the government adheres to its medium term fiscal targets. Ample
general government deposits at the CBI and record foreign exchange reserves
ameliorate near-term fiscal financing concerns. However, the risk of additional
contingent liabilities migrating to the sovereign's balance sheet remains high.	
	
Iceland's unorthodox crisis policy response has succeeded in preserving
sovereign creditworthiness in the face of unprecedented financial sector
distress. However, legacy issues remain, notably the protracted dispute over
Icesave, an offshore branch of the failed Landsbanki that accepted foreign
exchange deposits in the UK and the Netherlands, and the slow unwinding of
capital controls imposed in 2008.	
	
The impact of Icesave on Iceland's sovereign creditworthiness has diminished
over time and Landsbanki has begun to remunerate deposit liabilities.
Nonetheless, Fitch considers that Icesave still has the capacity to raise public
debt by 6%-13% of GDP, should an EFTA Court ruling go against Iceland.
Resolution of Icesave will be important for restoring normal relations with
external creditors and removing this uncertainty for public finances.	
	
Capital controls continue to block repatriation of USD3bn-USD4bn of non-resident
investment in ISK-denominated public debt and deposit instruments. Fitch
acknowledges that Iceland's exit from capital controls promises to be lengthy,
given the underlying risks to macroeconomic stability, fiscal financing and the
newly restructured commercial banks' deposit base.	
	
So far, Iceland has been relatively unaffected by the eurozone sovereign debt
crisis and, although growth is expected to slow to 2%-2.5% in 2012-13, Fitch
does not expect Iceland to slip back into recession. However, the private sector
remains heavily indebted - household debt exceeds 200% of disposable income and
corporate debt 210% of GDP - highlighting the need for further domestic debt
restructuring, while the key export sector has been held back by capacity
constraints and a lack of investment exacerbated in part by the slow unwinding
of capital controls.	
	
Fitch says that future sovereign rating actions will take a broad range of
factors into account including continued economic recovery and fiscal
consolidation and progress towards public and external debt reduction. Iceland
is still a relatively high income country with standards of governance, human
development and ease of doing business more akin to a high grade sovereign than
low investment grade. Accelerated private sector domestic debt restructuring, a
progressive unwinding of capital controls, normalisation of relations with
external creditors and enduring monetary and exchange rate stability would help
to further advance Iceland's investment grade status.	
	
Contact:	
	
Primary Analyst	
Paul Rawkins	
Senior Director	
+44 (0) 20 3530 1046	
Fitch Ratings Limited	
30 North Colonnade	
London, E14 5GN	
	
Secondary Analyst	
Douglas Renwick	
Senior Director	
+44 (0) 20 3530 1045	
	
Committee Chairperson	
Ed Parker	
Managing Director	
+ 44 (0) 20 3530 1176	
	
Additional information is available at www.fitchratings.com	
	
Applicable criteria, "Sovereign Rating Methodology", dated 15 August 2011, are
available on www.fitchratings.com.	
	
The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.	
	
Applicable Criteria and Related Research:	
Sovereign Rating Methodology

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