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S&P: Republic of Iceland Outlook Revised To Stable From Negative On Icesave Bill; Ratings Affirmed

January 04, 2010 | Standard & Poor's

FRANKFURT (Standard & Poor's) Dec. 31, 2009--Standard & Poor's Ratings
Services said today that it has revised its outlook on the Republic of
Iceland's sovereign ratings to stable from negative. At the same time, we
affirmed our long- and short-term 'BBB-/A-3' foreign currency and 'BBB+/A-2'
local currency ratings on the sovereign. The 'BBB-' transfer and
convertibility assessment was also affirmed.

The outlook revision is based on the successful passage through the Icelandic
parliament on Dec. 30, 2009, of legislation securing a sovereign guarantee
from the Republic for a loan by the Dutch and U.K. governments to the
Icelandic deposit guarantee fund. With this loan, Iceland is fulfilling its
obligation to compensate depositors in Icesave, a branch in The Netherlands
and the U.K. of the failed Icelandic bank Landsbanki. We expect that the
president of the Republic will sign the bill into law in due course.

"While parliamentary passage of the Icesave agreement will add significantly
to the general government's debt burden, it is a decisive step to unlock
further disbursements of up to ?2.3 billion from the International Monetary
Fund and from bilateral loans from Nordic governments," said Standard & Poor's
credit analyst Moritz Kraemer. These funds will alleviate Iceland's still weak
external liquidity position by raising the Central Bank's foreign exchange
reserves (currently around ?2.5 billion). Increasing foreign exchange reserves
are an important precondition for Iceland to loosen its capital account
controls, which were imposed in late November 2008.

Other significant and encouraging developments include the conclusion of the
restructuring of Iceland's failed banks and the passage of a tight 2010
budget, underpinned by an ambitious medium-term consolidation framework with a
view to bringing Iceland's 13% of GDP deficit (2009 estimate) back to balance
by 2013. While we consider that this target may be missed, the fiscal program
should succeed in containing gross general government debt at 130% of GDP in
2010, after which we see it declining gradually. If the tight fiscal policy is
adhered to in 2010 and beyond, the peak of net government debt will remain in
our view close to 100% of GDP. These assumptions hinge on a successful capital
account liberalization that would not lead to a renewed plunge of the
Icelandic krona, as this would not only inflate the krona equivalent of the
government's foreign currency debt, but also undermine future growth and
therefore revenue prospects. The long-delayed passage of the unpopular Icesave
agreement, which has been hotly debated throughout 2009, will in our view
support investor confidence in the ability of the government to formulate and
implement cohesive policies and secure necessary external financing, which
will make a disorderly opening of the capital account less likely and, other
things being equal, should support the currency. The recapitalization of the
failed banks was concluded in December 2009 and at 13% of GDP turned out to be
only half as costly to the Treasury as originally envisaged. Nevertheless,
contingent liabilities remain substantial, as downside risks to asset quality
linger in the context of an overleveraged private sector, a deep recession,
and record unemployment. Given the private sector's exposure to
foreign-currency loans, further depreciation of the krona would exacerbate
these risks.

"The stable outlook balances the challenges of the high public debt ratio and
remaining external vulnerabilities with our opinion that Iceland's economy and
institutions have above-average flexibility to deal with these challenges,"
said Mr. Kraemer.

Any clear signs that the prudent macro-approach of Iceland's authorities might
weaken (for example, significant fiscal slippages or the breakdown of
Iceland's IMF- and Nordic-supported adjustment program) could rapidly bring
Iceland's sovereign rating under renewed downward pressure and the rating
could drop below investment grade. Conversely, a successful continuation of
Iceland's hitherto appropriate policies, especially a smooth lifting of
capital controls and the implementation of a credible medium- to long-term
public debt-reduction strategy, would provide uplift to Iceland's rating.

Company: Iceland

Full company nameIceland
Country of riskIceland
Country of registrationIceland

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