Iceland’s Junk Rating May Last Two More Years

Iceland may keep its junk credit rating as long as two years or until it can completely lift capital controls that the government has warned could stay in place until 2015, Fitch Ratings said.

Fitch yesterday raised the outlook on Iceland’s BB+ rating to stable from negative as the fallout of an international depositor claims dispute recedes.

Even so, the revised outlook “implies that we are not expecting this rating to change over the next 12 to 24 months,” Fitch Senior Director Paul Rawkins said in an e-mailed reply to questions, after the ratings action was published.

Iceland may need some form of currency restrictions until 2015 as it works to restore its access to international markets following the 2008 collapse of its financial industry, the government said in March. The island faces a yearlong international court battle after its voters rejected a depositor claims accord with the U.K. and Netherlands last month, Finance Minister Steingrimur J. Sigfusson said April 10.

“Comprehensive lifting of capital controls would be a key step forward, because it would imply that many of the imbalances in the economy had been addressed, allowing the exchange rate to be determined by autonomous capital inflows and outflows,” Rawkins said in the e-mail.

Moody’s Still ‘Negative’

Moody’s Investors Service affirmed Iceland’s credit rating at the lowest investment grade of Baa3, with a negative outlook, on April 20.

“We see more downside risks than upside risks to the rating,” Moody’s analyst Kathrin Muehlbronner said in an e- mailed reply to questions. “It is important that the controls be relaxed as they restrict the availability of external funding and are an impediment to investment.”

Iceland is trying to reduce its outstanding foreign debt and this month announced it bought back 346 million euros ($490 million) in Eurobonds due in 2011 and 2012.

“Renewed sovereign access to international capital markets, rather than debt buybacks, has been the key focus of International Monetary Fund financial rescue packages and would be an important bellwether of improving creditworthiness in Iceland’s case,” Rawkins said.

According to Moody’s, the “recent buyback operation is positive in that it reduces further the repayments due in the next 12 months,” Muehlbronner said. “But it will not change the rating per se. The decline in the CDS spreads equally does not influence our current rating.”

Court Battle

The depositor claims dispute will be settled at the European Free Trade Association’s court in Luxembourg, Sigfusson said last month. The 2008 failure of Landsbanki Islands hf left about 350,000 foreign depositors, who used the high-yielding Icesave accounts, in danger of losing their savings.

Resolving the dispute is “an important step towards the normalization of relations with international creditors,” Fitch said in yesterday’s statement. “However, the capacity of this dispute to close off access to multilateral and bilateral funding for Iceland’s International Monetary Fund financial rescue program and put Iceland’s economic recovery at risk has clearly diminished.”

The estate of Landsbanki may be enough to cover all depositor claims, Prime Minister Johanna Sigurdardottir said in April.

Credit default swaps on Iceland’s five-year bonds have eased almost 20 percent since the end of April, indicating investors are less concerned about the risk of nonpayment.

“Movements in CDS spreads were not a driver of Fitch’s rating decision, although we note that they have been tightening for some time now,” Rawkins said in the e-mail.

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

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

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