S&P Raises Iceland Rating To 'BBB+', Fitch Affirms

(RTTNews) - Standard & Poor's upgraded Iceland's credit rating on Friday, citing further progress toward resolving the issues preventing the lifting of capital controls and declining debt levels.

The rating agency raised its long­ term sovereign credit ratings on Iceland to 'BBB+' from 'BBB' with stable outlook and affirmed the short term ratings at 'A­2'.

"The upgrade primarily reflects the further progress Iceland has achieved in resolving the issues standing in the way of capital account liberalization since June 2015," S&P said.

"In particular, the comprehensive proposals unveiled in mid­-2015 have received support from the creditors of the three banks that defaulted in the 2008 crisis (the old bank estates), thereby reducing the uncertainties surrounding the capital account liberalization plan."

Iceland had imposed capital controls in 2008 to avoid a flight of funds from the country after the biggest three banks, namely Kaupthing, Glitnir and LBI defaulted on $85 billion debt. The government decided last year to lift them progressively.

Further, S&P said the upgrade also reflects the expectation that general government debt will continue to decline over the next four years, lowering government expenditure on interest payments.

Meanwhile, the stable outlook balances the upside potential stemming from materially faster-than-anticipated reduction in public debt levels against downside risks, primarily stemming from the expectation of sizable wage hikes, the agency added.

The Transfer & Convertibility Assessment, which shows the probability of capital and exchange controls being imposed, was also raised to 'BBB+' from 'BBB'.

Iceland's ratings may be raised further if capital controls are fully lifted without putting the balance of payments or financial stability at risk, S&P said.

Elsewhere, Fitch Ratings affirmed Iceland's long-term foreign and local currency Issuer Default Ratings at 'BBB+' and 'A-', respectively with Stable Outlooks.

The ratings are underpinned by a very high level of income per capita compared with 'BBB' rating peers, and indicators of human development and governance more akin to the highest-rated sovereigns, the agency noted.

Fitch said Iceland's public debt sustainability is improving and the process leading to capital account liberalization will bring about a sizeable, one-off improvement in fiscal balances in 2016.

Sustained robust growth momentum without excessive imbalances and continued improvements in debt dynamics and external balance could lead to an upgrade, the agency said.