Aug. 16 (Bloomberg) -- The Faroe Islands’ fight with the European Union over herring could spell higher borrowing costs as the 49,000-person North Atlantic archipelago struggles to cut deficits.
Moody’s Investors Service this week placed the Aa3 rating of the self-governing Danish territory on review for a downgrade following last month’s EU vote to impose sanctions after a dispute over herring fishing.
The spat started after the Faroe Islands more than tripled an annual quota from the Atlanto-Scandian herring stock to 105,000 tons in 2013. The European Commission is due to decide this month on measures that may include import bans and blocking Faroese vessels from the 28-nation bloc’s ports, according to the EU Committee for Fisheries and Aquaculture.
Moody’s review affects about 4.2 billion kroner ($745 million) in bond debt and a negative outcome could drive up borrowing costs when the 18-island territory seeks to tap markets again next year, Malan Johansen, head of debt management at the Faroe Accountancy and Financial Department, said in a telephone interview from Torshavn.
EU sanctions and a downgrade could “mean that the interest rate won’t be as good,” she said.
The territory, which relies on fishing for 90 percent of its exports, sold 1 billion kroner in four-year bonds in June at a coupon of 1.75 percent. The main buyers include Danish banks, which sell them on to institutional investors.
Interest in the debt “was very good -- the demand was greater than what we offered,” she said. “We got offers for about 2 billion kroner.”
The Governmental Bank of the Faroes said in a March report that it predicted a financing need of 3 percent of gross domestic product this year, down from 8 percent last year. Next year the financing need will rise to 14 percent of GDP as debt matures, according to a report. The bank said it expects nominal GDP to expand 4.9 percent this year and 1.4 percent next year.
“The government and parliament have a stated goal of achieving a budget surplus by 2016,” the bank said in the report. “It’s doubtful whether this can be achieved but as household consumption increases, public finances also improve as revenue from taxes and duties grow.”
According to United Nations’ rules, the Faroese are required to reach an agreement on the size of the annual catch with the EU, Russia, Norway and Iceland.
The Faroe government intends to take the dispute with the EU to a court of arbitration in accordance with the United Nations Convention on the Law of the Sea, state broadcaster KVF reported today. A lawyer has been hired to oversee the case for the Faroese.
The current allocation doesn’t reflect “the distribution and dependence of Atlanto-Scandian herring in Faroese waters today, nor the long-standing dependency of the Faroe Islands on fisheries,” Prime Minister Kaj Leo Holm Johannesen said in a statement.
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