Bloomberg News

Iceland Raised to Investment Grade at Fitch on Recovery

February 20, 2012

(Updates with comments from Economy Minister in fifth paragraph, Prime Minister in seventh and Finance Minister in 13th paragraphs.)

Feb. 17 (Bloomberg) -- Iceland was raised to investment grade at Fitch Ratings after the island pushed through measures that helped stabilize its financial markets and revive growth following the economic collapse of 2008.

The island’s long-term issuer default rating was raised to BBB-, from BB+, Fitch said it a statement today. The outlook is stable, it said.

The move “reflects the progress that has been made in restoring macro-economic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness since the 2008 banking and currency crisis,” Paul Rawkins, Fitch senior director, said in the statement.

The economy of Iceland, which exited a 33-month International Monetary Fund program in August, will grow faster than the euro area average this year and next after the island’s authorities spurred household demand by backing debt relief programs. At the same time, Iceland is easing its capital restrictions and has tapped international bond markets since its financial collapse.

“I’d appreciate if Iceland could, within a short period of time, begin to get even higher investment grades,” Economy Minister Steingrimur J. Sigfusson said in an interview. “If you look at the strength of Iceland’s economy, that’s well deserved. Iceland’s credit rating is still very much undervalued.”

Important Message

The krona gained 0.3 percent against the dollar and traded at 123.40 as of 4:01 p.m. in Reykjavik. The yield on Iceland’s dollar-denominated $1 billion note due in 2016 fell three basis points to 4.77 percent.

“This news is very positive and is an important message to the world that Iceland is on the right path,” Prime Minister Johanna Sigurdardottir said in a text message to Bloomberg. “Hopefully, this will increase the faith of domestic and foreign investors in the possibilities of Iceland’s economy and spur people’s optimism and courage to take action.”

The island’s resurrection follows the October 2008 failure of its biggest banks, which defaulted on $85 billion in debt. Those events prompted the central bank to impose capital restrictions to protect the krona from a sell-off.

Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based Organization for Economic Cooperation and Development estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to the latest forecasts in November.

Promising Recovery

“Iceland has successfully exited its IMF program and gained renewed access to international capital markets,” Rawkins said. “A promising economic recovery is underway, financial sector restructuring is well-advanced, while public debt to gross domestic product appears to be close to peaking on the back of a robust fiscal consolidation program.”

Gross general government debt probably peaked at about 100 percent of GDP in 2011, according to Fitch. Net debt is “significantly lower” at about 65 percent, the rating company estimates.

Iceland returned to international debt markets in June, receiving bids for twice the $1 billion in five year notes it sold. Credit default swaps, which investors use to bet on the likelihood of a credit event, on Iceland’s five-year debt were at 261 basis points on Feb. 16, lower than equivalent contracts for both Spain and Italy.

‘Very Favorable’

The ratings upgrade “is very favorable for our economy and will support our continued efforts to get Iceland out of its recession,” Finance Minister Oddny Hardardottir said in a phone interview.

Iceland is enjoying upgrades as Moody’s earlier this week downgraded six euro countries, including Italy and Spain, as leaders in the region struggle to contain the debt crisis. Spain was downgraded to A3 from A1 and Italy to A3 from A2, while Iceland is rated lower at Baa3 by Moody’s. Iceland is ranked Baa3 at Moody’s and BBB- at Standard & Poor’s, both investment grade ratings.

“Iceland’s unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness in the face of unprecedented financial sector distress,” Rawkins said. “However, legacy issues remain, notably the protracted dispute over Icesave,” an offshore branch of the failed Landsbanki Islands hf that accepted foreign exchange deposits in the U.K. and the Netherlands, and the “slow unwinding” of capital controls imposed in 2008, he said.

Iceland has started currency auctions as it scales back the krona controls. The central bank hasn’t set a target date for removing the restrictions and says the plan follows given financial targets.

“The better our investment grade is, and the more favorable the cost of refinancing Iceland’s debts,” the sooner Iceland will remove its capital controls, Sigfusson said. “We want to be in a position to be able to decide when we refinance our debts and how we manage our debts.”

--Editors: Tasneem Brogger, Jonas Bergman.

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

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


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