Iceland Outlook Raised at S&P on Growth

Standard & Poor’s raised the outlook on Iceland’s credit rating to stable from negative as the island’s economy returns to growth after emerging from its 2008 bank industry meltdown.

S&P affirmed the ‘BBB-/A-3’ sovereign ratings on Iceland, the rating company said in a statement yesterday. Iceland carries the lowest investment grade at S&P and Moody’s Investors Service. The island’s debt is ranked junk by Fitch Ratings.

“Iceland’s economy is recovering from the systemic failure of its three largest banks, and has returned to positive economic growth after two years of severe contraction,” S&P said in the statement.

Iceland last week announced the economy is stable enough to allow the central bank to proceed with the next step in easing capital controls, in place since the island’s three biggest banks defaulted on $85 billion three years ago. The island will grow faster than the euro area this year, the International Monetary Fund estimates, while the cost of insuring against an Icelandic default is lower than the average for the euro region.

“Significant headway has been made in restructuring the private-sector balance sheet and we expect the process to be mostly completed by mid-2012,” S&P said. The raised outlook on the BBB- grade “balances our view of Iceland’s improved economic fundamentals with downside risks associated with capital controls being lifted in the next few years.”

GDP Outperformance

Iceland’s economy will grow 2.5 percent this year and next, versus 1.6 percent in the euro area this year and 1.1 percent in 2012, the IMF said Sept. 20. Next year, Iceland’s current account surplus will widen to 3.2 percent of the economy and unemployment will be 6 percent, versus 9.9 percent in the euro area, the fund said.

Statistics Iceland today raised its forecast for Iceland’s economic growth this year to 2.6 percent from 2.5 percent previously. The economy will grow less in the next two years than the office estimated in July. Output will expand 2.4 percent next year and 2.5 percent in 2013, it said.

Fitch Senior Director Paul Rawkins signaled last month the company isn’t close to raising Iceland to investment grade. Rawkins said then the island hasn’t progressed far enough in solving its household debt burden, adding an upgrade is unlikely unless there’s an orderly unwinding of the capital controls.

‘Not Satisfied’

Fitch’s rating “doesn’t get in our way, although I believe that Iceland’s creditworthiness is undervalued,” Finance Minister Steingrimur Sigfusson said in an interview yesterday. “We’re not satisfied with their rating of Iceland. The ratings of S&P and Moody’s Investors Service are, however, a good input.”

Moody’s rates Iceland’s long-term foreign debt Baa3, with a negative outlook.

The recovery has allowed the central bank to press ahead with capital liberalizations that the government estimates will be completed in 2013. The approach allows foreign investors eager to offload krona holdings to transfer them to foreign or local investors willing to commit long-term to the island, according to the central bank.

“The ratings on Iceland are constrained by high external and public-sector debt that we believe could become heavier still, if not for capital controls limiting residents’ ability to invest overseas and nonresidents’ ability to exchange krona holdings for foreign currencies,” S&P said.

To contact the reporter on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net

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

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