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 Iceland Ratings Lowered by Moody's; Outlook Negative (Update3) By Tasneem Brogger Dec. 4 (Bloomberg) -- Iceland had its foreign and local currency ratings downgraded by Moody's Investors Service after the government was forced to pile up debt in an effort to revive the economy. Moody's downgraded the foreign and local currency ratings of Iceland to Baa1 with a negative outlook from A1, the agency said in a statement today. "The downgrade reflects Moody's view that the Icelandic government's financial strength has been significantly damaged by the banking and currency crisis," Kenneth Orchard, a senior analyst at Moody's in London, said in the statement. Iceland last month got approval for an International Monetary Fund-led loan worth as much as $5.3 billion. The country will be granted an additional $6.3 billion from the U.K., Germany and the Netherlands to cover deposit guarantees at failed Icelandic lender Landsbanki Islands hf. That means the island's population of about 320,000 must shoulder debt worth more than $11 billion. The currency has lost about two thirds of its value this year. The krona gained 4.8 percent against the euro to trade at 178.26 as of 1:19 p.m. in Reykjavik. Offshore, the krona traded at about 330 per euro earlier this week, according to TD Securities in London. The central bank said it returned the currency to a partial free float today after it last week imposed capital restrictions preventing foreigners from exiting krona-denominated investments. Debt Most Icelanders have car loans in foreign currency, while soaring inflation, which may surge as high as 75 percent in coming months according to Danske Bank A/S, means households' index- linked mortgage payments will jump. "The impact of the crisis on the economy, the restructuring of the banking sector and the task of stabilizing the currency will force the government to assume sizeable amounts of debt that will weigh on the public sector balance sheet for many years," Orchard said. Loans taken on by Iceland's government will bring national debt to 109 percent of gross domestic product by the end of next year, the government estimates. The country's three biggest banks failed under the weight of their debt in October, precipitating the collapse of the currency and sending the economy into a recession. Gross domestic product may contract as much as 10 percent next year, the IMF estimates. Moody's also cut its issuer rating and local currency bond ratings on the state-backed mortgage lender, the Housing Financing Fund, to Baa1 from A1, it said in a separate statement today. The outlook on the ratings is negative, it added. To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net; Last Updated: December 4, 2008 10:15 EST |
