LONDON (Standard & Poor's) Oct. 6, 2008--Standard & Poor's Ratings Services
said today that it lowered its foreign currency sovereign credit rating on the
Republic of Iceland to 'BBB/A-3' from 'A-/A-2' and its local currency
sovereign credit rating to 'BBB+/A-2' from 'A+/A-1'. Standard & Poor's also
said that it removed the long-term ratings from CreditWatch, where they were
placed on Sept. 29, 2008, with negative implications. In addition, Standard &
Poor's lowered its transfer and convertibility assessment on Iceland to 'A-'
from 'AA-'.
In conjunction with these rating actions, Standard & Poor's also lowered
its foreign currency ratings on Ibudalanasjodur (Housing Financing Fund; HFF),
the government-owned enterprise for housing finance, to 'BBB/A-3' from
'A-/A-2' and its local currency rating to 'BBB/A-3' from 'A+/A-1'. In
addition, Standard & Poor's removed the long-term ratings on HFF from
CreditWatch, where they were placed Sept. 29, 2008, with negative
implications.
The outlook on both the Icelandic government and HFF is negative, which
indicates that the balance of risks is on the downside.
"These rating actions follow the Icelandic government's announcement
that it will guarantee deposits of the domestic banking system and its pending
legislation to grant the Financial System Supervisor greater power to
intervene in Icelandic banks," explained Standard & Poor's credit analyst
Eileen Zhang. In a speech to the Icelandic public today, Prime Minister Geir
Haarde implied that depositors and creditors of overseas subsidiaries of
Icelandic banks must rely on the financial resources of the overseas
subsidiaries themselves and even warned that the Icelandic banks may "become
to some extent non operational." Standard & Poor's believes that these
measures will help to limit the contingent fiscal risks to the government and
thus help preserve the investment-grade rating, but they will also limit the
Icelandic banking system's access to international markets, which in turn will
engender a contraction of real GDP that is much sharper than we had foreseen.
This economic contraction, combined with the depreciation of the krona, will
hurt the asset quality of the banks, depress the fiscal revenues of the state,
and markedly alter what had been low government debt levels.
"We removed the ratings from CreditWatch because of our view that the
acute pressures on the nation's external position will be staunched by these
government efforts to preserve the domestic banking system at the expense of
its foreign subsidiaries and perhaps its external creditors and by efforts we
expect shortly to augment international reserves," Ms. Zhang added. "The
negative outlook speaks to more medium-term issues regarding the ability of
policymakers to adjust the Icelandic model to lower and less volatile growth,
with a much smaller contribution from its financial sector." |
