Iceland Ratings Upgrade Paves Way for Faster FX Regime Exit

Iceland sees more momentum to unwind its almost eight-year-old capital control regime after having its credit grade raised.

The island’s debt rating was raised late Thursday by two steps to A3 from Baa2 at Moody’s Investors Services, its first upgrade since 2015. The move “reflects the speed and extent of the country’s recent progress in recovering from its 2008 banking crisis,” Moody’s said.

Iceland has settled with the creditors in its failed banks, held currency auctions to enable an orderly unwinding of offshore krona holdings and is now currency dismantling restrictions for consumer and corporations.

Removing the capital controls "may become easier" after the Moody’s upgrade, Finance Minister Bjarni Benediktsson said in an interview late on Thursday. “We’re not in any immediate need for financing -- we’ve lately rather been seeking to reduce debt -- but it’s clear that this improved credit rating is helpful.”

Iceland’s 2.5 percent 750 million-euro ($839 million) bond maturing in 2020 has returned 6.2 percent over the past year, beating the 2.7 percent return on Bloomberg’s 3-5 year euro government bond index.

Even so, Iceland faces a potential lawsuit from investors reluctant to accept the roughly 40 percent krona discount the island offered to set them free of capital controls. The offshore krona overhang remains at around 11 percent of gross domestic product following the auction.

"This rating upgrade is great news for Iceland," Valdimar Armann, an economist with Reykjavik-based asset manager Gamma, said in a telephone interview. "This should help Iceland in further liberalization of capital controls in near future and underlines the strong position of the country and a great turnaround from the economic adjustment it went through in 2008."

The rating action comes as the government heads into an election set for Oct. 29. Benediktsson’s Independence Party tops the polls at 24.6 percent, ahead of the upstart Pirate Party at 22.4 percent. The government’s coalition partner, the Progressive Party, had support of 10.6%, according to the MMR poll released Aug. 30.

Bjarni Benediktsson on Aug. 24,
Bjarni Benediktsson on Aug. 24,
Photographer: Arnaldur Haldorsson/Bloomberg

For more on the Iceland election see here.

Benediktsson said he couldn’t immediately say whether Iceland will now seek to refinance foreign debts.

"But at least we can be optimistic that the next time we seek to refinance our debts or take out new loans in the international markets, that the terms will be better,” he said. “The large Icelandic companies that finance themselves in the international markets will immediately enjoy the benefits of that."

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