30.07.2010 15:17
Credit rating agency Moody's Investors Service has changed the outlook for the Republic of Iceland's sovereign credit rating from stable to negative. In its press release, the agency states cites the uncertainty stemming from the Supreme Court judgments on exchange rate-linked loans and the lack of a resolution of the Icesave dispute as the reasons for the change. It goes on to say that the Supreme Court judgments create the risk that the State will have to provide further support for the banking system as a result of potential losses on foreign-denominated loans, which in turn would reduce the likelihood that the Treasury could fulfil its financial obligations. The sovereign credit rating for long-term obligations in foreign and local currency is Baa3, Moody's lowest investment-grade rating. The change in the outlook increases the likelihood that the sovereign will fall into speculative grade in the next 12-18 months. Fitch Ratings has already assigned the Republic of Iceland speculative grade ratings. Clearly, it would be bad news indeed if Moody's were to downgrade the sovereign to speculative grade as well, as junk status would make it difficult for the Treasury to borrow abroad and would undermine market confidence in Iceland. The outlook is negative for the Republic's sovereign ratings from all three of the largest rating agencies, Moody's, Fitch, and Standard & Poor's.
Fitch is worried as well It will be interesting to see what the other agencies do now. Fitch Ratings also appears concerned about the Supreme Court rulings on FX loans, as Fitch analyst Paul Rawkins said in a recent interview with Bloomberg that the judgments had a negative impact on financial stability in Iceland. In Rawkins' opinion, the Court's decisions will probably delay economic recovery in Iceland. His comments make it quite clear that the Court's judgments do not have a positive effect on Iceland's sovereign credit ratings; however, Fitch has not responded to the judgments by downgrading the Republic or changing its outlook. Actually, Fitch has not been heard from since it downgraded Iceland's foreign-currency obligations to speculative grade (BB+) since early January, when the president of Iceland referred the Icesave agreement to a national referendum.