Tags: Pressure | Increases | Iceland | Moody's | Instability | Hurt | Ratings

Pressure Increases on Iceland as Moody's Warns Instability Could Hurt Ratings

Wednesday, 06 Jan 2010 12:39 PM

Moody's Investors Service said on Wednesday that Iceland's refusal to repay Britain and the Netherlands more than $5 billion could lead to political instability which could pressure ratings.

"Any indication of renewed political instability and/or serious international pressure would signal real credit concerns and could lead to a negative rating action," said Kenneth Orchard, an analyst at Moody's.

Iceland currently has a Baa3 rating.

After weeks of heated debate, Iceland's parliament narrowly approved a repayment of the "Icesave" bill last week.

But Icelandic President Olafur Ragnar Grimsson used his constitutional power on Tuesday to force a referendum by refusing to sign it.

After that move, Fitch Ratings cut Iceland's long-term sovereign foreign currency credit rating one notch to BB-plus — junk status — and Standard & Poor's said it could cut, by one or two notches, its current BBB-minus rating to junk.

If voters reject the bill, as opinion surveys suggest they might, it would put pressure on the coalition government of Social Democrats and Left-Greens to resign, as well as face regional isolation.

"The government's financial position is well placed to weather a period of temporary uncertainty without impact on its rating," said Orchard.

But renewed political uncertainty, together with intensified international pressure, would complicate Iceland's emergence from the crisis.

Fiscal consolidation could be delayed, while foreign financing from Nordic governments, and therefore the IMF also, is likely to be suspended, at least temporarily, Moody's said in a statement.

Separately, Iceland's economy minister said on Wednesday an IMF aid program and efforts to loosen capital controls were on hold until the country resolved its Icesave impasse, with a risk of a prolonged economic slump.

"It looks like the IMF program is delayed," Economics Minister Gylfi Magnusson said in a telephone interview. "You could say it's put on ice until the problem has been solved."

Magnusson added: "Any further lifting (of currency controls) is almost certainly going to wait until this has been resolved."

The government, according to a draft bill seen by Reuters on Wednesday, is proposing a Feb 20 referendum on the Icesave bill, which authorizes repaying Britain and the Netherlands more than $5 billion lost in failed bank accounts.

A rejection would lead to more economic pain, the minister said.

"We haven't tried to put a figure on it but basically what we had envisioned was a slow economic recovery (this year)," he said.

"If no external financing is available then almost certainly the planned investments will not materialize and that means that economic growth will be less or actually that we will almost certainly have a contraction this year."

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Moody's Investors Service said on Wednesday that Iceland's refusal to repay Britain and the Netherlands more than $5 billion could lead to political instability which could pressure ratings. Any indication of renewed political instability and/or serious international...
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2010-39-06
 

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