ICELAND RISKS having its credit rating downgraded to junk status if it fails to resolve the Icesave debt dispute with Britain and the Netherlands, Moody’s has warned.
The credit rating agency downgraded its outlook for Iceland to negative from stable amid deadlock in talks over €3.9 billion lost by British and Dutch depositors in the collapsed Icesave bank.
The move came a month after a deal to repay the money was rejected by 93 per cent of Icelandic voters in a referendum, despite warnings from the UK that the country risked isolation if it failed to settle the debt.
The dispute has held up crucial economic support from the International Monetary Fund and other lenders because the loans, agreed after the Icelandic banking sector collapsed in 2008, were conditional on Reykjavik fulfilling its international obligations.
Moody’s said the country’s sovereign rating – one notch above junk status at Baa3 – could be placed on review for downgrade if the dispute continued to obstruct access to international finance.
“The recovery of the Icelandic economy is threatened by the delays in the resolution of the Icesave dispute,” said Kenneth Orchard, head of Moody’s sovereign risk group.
Iceland has repeatedly stressed its commitment to reimbursing the cash, but wants Britain and the Netherlands to accept softer repayment terms amid public anger that taxpayers are being asked to pay for bankers and regulators’ errors.
Reykjavik called for fresh negotiations after last month’s referendum, but political uncertainty in Britain and the Netherlands ahead of elections in both countries has in part prevented this.
Moody’s stressed there were no immediate payment concerns over Icelandic sovereign debt, and said a resolution of the Icesave dispute remained the likeliest outcome. It warned that the stalled negotiations raised questions about the country’s ability to refinance eurobonds maturing in December 2011 and May 2012. – (Copyright The Financial Times Limited 2010)
