Iceland Closer to U.K., Dutch Depositor Deal That May Spark Rating Upgrade

Iceland may be weeks away from a depositor accord with the U.K. and Netherlands that Moody’s Investors Service said could boost its credit rating as the island moves a step closer to normalizing its international relations.

A “final resolution” of the so-called Icesave dispute to settle foreign depositor claims stemming from the 2008 failure of Landsbanki Islands hf is possible within weeks, the Reykjavik-based Finance Ministry said yesterday. That would end more than two years of limbo that saw the U.K. resort to anti- terror legislation to freeze Icelandic assets and soured the Atlantic island’s international ties as it embarks on European Union accession talks.

“A resolution to the Icesave dispute is an important consideration for the rating,” said Kathrin Muehlbronner, a London-based credit analyst at Moody’s, in an e-mailed reply to questions late yesterday. “Hence, a positive resolution would be positive.”

Iceland’s debt is rated Baa3 at Moody’s and BBB- at Standard & Poor’s, the lowest investment grades. Fitch Ratings has ranked the island’s bonds junk since Jan. 5, when President Olafur R. Grimsson blocked an Icesave accord with the U.K. and Dutch that had won majority backing in parliament. The bill was subsequently rejected by 93 percent of voters in a March 6 referendum. The three countries have struggled since to agree on repayment terms of the $5.2 billion loan needed to cover the depositor losses.

‘False Dawns’

“Final resolution of Icesave would be an important step towards normalizing relations with the international financial community and putting bilateral funding for the international financial rescue on a firmer footing,” Fitch Senior Director Paul Rawkins said in an e-mailed reply to questions today.

Still, Rawkins said he will “remain cautious” as there have been “a number of ‘false dawns’ on Icesave.”

Standard & Poor’s won’t comment on the ratings impact of a possible deal until an Icesave agreement is announced by all three countries, said Eileen Zhang, London-based associate director of sovereign ratings at S&P, in an e-mailed reply to questions.

Niels Redeker, a spokesman for the Dutch Finance Ministry in The Hague, told Bloomberg he was unaware of any agreement being reached. A spokesman for the U.K. Treasury in London said negotiations are ongoing, without elaborating.

‘Favorable’

The government is this time targeting broader lawmaker backing to ensure a smoother passage of a new Icesave bill. The Independence Party, the largest opposition group, has signaled it may give its support to the Social-Democrat, Left-Green coalition. That would reduce the likelihood of a presidential veto against any new deal on Icesave, as the high-yielding internet accounts were called.

“I’ve followed the matter through our representative in the negotiating team and I’ve been informed that there’s a chance of reaching a much more favorable agreement,” said Bjarni Benediktsson, the head of the Independence Party, in a phone interview yesterday.

Vilhjalmur Egilsson, managing director at the Confederation of Icelandic Employers, signalled his group would also back a new accord, in an interview.

“Whether this will indeed have an immediate impact on the rating will depend on the exact terms of the agreement,” Muehlbronner said.

‘Broad Unity’

The draft accord reached carries a 3 percent interest rate and gives Iceland’s government a nine-month moratorium on paying interest, the country’s Channel 2 television station said on Nov. 15. The Finance Ministry declined to comment on the details of any talks. The accord will cost the government 40 billion kronur ($355 million) to 60 billion kronur, the broadcaster said. The remainder would be covered by the value of Landsbanki assets.

“According to my sources in Brussels, an agreement with the U.K. and the Netherlands has been ready for a few weeks, but it hasn’t been introduced as Iceland’s Foreign Minister” Ossur Skarphedinsson “is working on achieving broad unity in the matter in Iceland,” said Eirikur Bergmann, a professor in political science at Bifrost University, in an interview. “In that regard, the position of the Independence Party matters most.”

A possible resolution of Icesave comes as the government is grappling with a debt relief bill that creditors in the island’s failed banks have warned may trigger legal action as they try to protect their interests.

“Icesave is not the only factor driving the rating,” Muehlbronner said. “There are ongoing uncertainties regarding banking sector stability, other legal disputes and last but not least regarding the economic and fiscal outlook.”

To contact the reporter on this story: Omar Valdimarsson in London at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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