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S&P: Republic of Iceland Ratings Kept On CreditWatch Negative On Continuing Uncertainty About International Financing

February 01, 2010 | Standard & Poor's

FRANKFURT (Standard & Poor's) Jan. 29, 2010--Standard & Poor's Ratings
Services said today its 'BBB-/A-3' long- and short-term foreign currency
ratings and its 'BBB+/A-2' long- and short-term local currency ratings on the
Republic of Iceland remain on CreditWatch where they were placed with negative
implications on Jan. 5, 2010.

"The CreditWatch status indicates the likelihood of a downgrade if we see that
political uncertainty is increasing and external liquidity pressures are
likely to persist in the wake of President Olafur Ragnar Grimsson's veto of
the "Icesave Act," which parliament passed late last year," said Standard &
Poor's credit analyst Moritz Kraemer.

At the time of the CreditWatch placement, we expected to have greater clarity
by the end of January on the implications of the President's veto on the
political will to enact other measures to restore investor confidence as well
as information about the availability of official external financing. However,
a decision on continued financing from the International Monetary Fund (IMF)
and the Nordic governments to underpin Iceland's economic adjustment policy
has taken longer than we anticipated.

Whether or not the Icesave legislation will become law is now going to be
decided by the Icelandic electorate in a referendum on March 6, 2010. Opinion
polls suggest that a significant majority of the public remains opposed to the
legislation and a rejection at the referendum appears likely. In 2009,
Iceland's parliament passed similar Icesave loan guarantee legislation, which
was signed by the President. This legislation stipulated that the guarantee
would not be open ended, and we believe it is partly for this reason that the
Dutch and British governments rejected it.

If the referendum were to be rejected, further political negotiations could
still lead to a compromise acceptable to all three nations, possibly
facilitated by a neutral mediator. We consider that the upcoming general
elections in the U.K. could increase the risks to a potential compromise. We
also think it is conceivable that the Nordic governments might continue to
disburse the bilateral loan tranches without a formal new agreement between
Iceland and the Dutch and British governments, which would unlock
complementary IMF financing. Indeed, the first Nordic tranche was disbursed in
mid-December 2009, following cabinet's agreement on the Icesave bill. This was
despite disbursement being subject to parliamentary approval, which only
followed at the end of the month and was subsequently vetoed by the President.

We believe that any developments that lead to secure external financing could
bring the Icelandic government's adjustment and financing program back on
track and stabilize the rating, as would an unexpected "yes" vote at the
referendum. Failure to generate a compromise that would secure continued
external financial support, possibly exacerbated by a collapse of the ruling
coalition, would hamper the already difficult environment for policy
formulation and implementation and increase the risk of continued economic
disruption and another currency depreciation.

We expect to resolve the CreditWatch status before the end of April 2010, once
there is greater clarity about the prospects for resuming multilateral and
bilateral external financing flows and the political will to enact other
measures to restore investor confidence.

"If we see that a political impasse persists or if we consider Iceland's
access to official external financing to be more than just temporarily
impaired, we could lower our ratings on Iceland by one or two notches," said
Mr. Kraemer. "A political compromise securing continued access to external
funding or a surprise referendum outcome approving the Icesave legislation
could lead to an affirmation of the ratings at the current level."

Company: Iceland

Full company nameIceland
Country of riskIceland
Country of registrationIceland


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