April 14, 2011

Iceland Risks Junk Rating in Wake of Vote

Government survives no confidence vote

After voters in Iceland rejected a negotiated deal to repay Britain and the Netherlands for their losses in the wake of the Icesave collapse, Standard & Poor’s said Wednesday that the country risks having its sovereign status downgraded to the level of junk—a rating it already holds from Fitch, and which is also threatened by Moody’s.

 The center-left government survived a no confidence vote on Wednesday, and its Nordic neighbors have pledged to continue lending it money as long as it adheres to its IMF obligation and continues to honor international obligations.

Reuters reported that over the weekend, Icelanders said no to a state guarantee to repay more than $5 billion to the U.K. and the Netherlands after those countries bailed out their depositors from losses incurred from the collapse of Landsbanki in 2008. The country now faces the possibility of a court-ordered settlement, as the issue is now likely to come before a European Free Trade Association (EFTA) court.

While at first Prime Minister Johanna Sigurdardottir had argued for the vote so that the matter could be settled, after citizens refused, she said instead that there was some ambiguity as to what the country should bear responsibility for.

In a statement, Sigurdardottir said, "The Icelandic electorate was presented with two evils last Saturday—to assume a responsibility they believe is not theirs, or to risk a verdict that may be heavy to carry." She continued, "The government of Iceland has always said it would honor its international obligations, but there is a great deal of uncertainty as to what these alleged 'international obligations' entail in actual fact—opinion on and interpretation of the European directive in question is highly disputable."

The no vote could endanger Iceland’s ability to refinance itself in foreign markets, according to Franek Rozwadowski, resident representative in Iceland of the International Monetary Fund (IMF). Currently Iceland’s foreign currency rating from S&P is BBB-/A-3, with Fitch rating Iceland as junk and Moody’s having warned that a no vote could lead to a downgrade to junk status.

Sweden, Norway, Denmark and Finland have said they will continue to provide promised funding to Iceland, although a Finnish finance ministry official said that loan extensions need to be discussed.

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