UPDATE 1-Fitch cuts Iceland currency ratings on bank rescue

(Recasts lead, adds Moody’s ratings actions)

NEW YORK, Sept 30 (Reuters) - Credit rating agencies continued to take action against Iceland and its troubled banks on Tuesday, a day after the authorities took control of the country’s third-largest lender following a liquidity crisis.

The Icelandic currency, the crown, tumbled on the news, slumping 4.5 percent against the euro to 149.38 after crossing the 150 per euro level for the first time. The crown fell 7.1 percent against the dollar to 106.10.

Fitch Ratings downgraded Iceland’s long-term foreign- and local-currency issuer default ratings and placed the country’s sovereign ratings on review for a possible downgrade.

The agency said the takeover of Glitnir Bank GLB.IC, has underlined the deteriorating credit profile of Iceland's major banks. The agency downgraded Glitnir and its bigger rivals Kaupthing and Landsbanki.

Moody’s Investors Service said it has placed Iceland’s government bond ratings and country ceiling for foreign currency bank deposits on review for a possible downgrade.

Moody’s also slashed ratings on Glitnir and placed the two bigger banks on review for a downgrade.

The Icelandic authorities purchased a 75 percent stake in Glitnir for 600 million euros, tapped from foreign exchange reserves. The bailout came after a sudden downturn in the bank’s funding led investors to pummel its shares.

“Following this action and the ensuing Fitch downgrades of the banks, Fitch judges that the risks to macroeconomic stability and sovereign creditworthiness arising from distress in the banking system have materially increased,” Paul Rawkins, senior director on Fitch’s London-based sovereign rating team said in a statement.

Fitch cut Iceland’s long-term foreign-currency IDR rating by two notches to ‘A-‘, the seventh-highest investment grade in its scale. The agency lowered the country’s local-currency IDR rating by one notch to ‘AA’, or third-highest investment grade. For more see [ID:nWNA5366].

On Monday, Standard & Poor’s cut Iceland’s long-term foreign-currency sovereign credit rating to ‘A-’ from ‘A’, the seventh-highest investment grade. [ID:nN29397200].

Fitch said the country’s sovereign ratings are supported by the government’s low debt ratio, high per capita gross domestic product and institutional strengths.

“The government’s own external debt service profile is very modest,” said Rawkins.

Iceland’s banks and its economy have been caught up in the broader global financial crisis this year with worries focused on the banks’ ability to refinance foreign debt taken on as they expanded overseas in recent years.

A steep slide in the value of the crown has increased the amount banks must pay to service debt and fueled inflationary pressure in an already unbalanced economy. [ID:nLT508788].

Fitch said the combined impact of the crown’s slide and double-digit inflation rates could push the stock of private sector credit beyond 500 percent of GDP by year-end, increasing the risk of a hard landing for the economy in 2009. (Reporting by Ciara Linnane; Editing by James Dalgleish)