Iceland Credit Risks Rise ‘Considerably,’ S&P Says (Update2)
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By Tasneem Brogger
Jan. 18 (Bloomberg) -- Iceland’s credit risk may rise “considerably” as the island faces the threat of a shelved emergency bailout and a government collapse, Standard & Poor’s said.
“The risk is there that the program will fall apart and with that, the downside risks would increase very considerably,” Moritz Kraemer, S&P’s managing director for Europe, the Middle East and Africa, said in a Jan. 15 telephone interview. If the outlook for the bailout program doesn’t improve, “it’s quite possible” the government will collapse.
President Olafur R. Grimsson’s Jan. 5 decision to block a U.K. and Dutch depositor accord called into question the continued disbursement of a $4.6 billion loan from the International Monetary Fund and the Nordic countries that Iceland needs to avert default. Fitch Ratings cut the island’s credit grade to junk the same day and S&P said it may lower its BBB- rating to non-investment grade within a month if the rejection halts bailout flows.
“We were not encouraged by the statement of the president because it also made it clear that predictability of policy implementation in Iceland is not what we thought it would be,” Kraemer said. “The political process has turned out to be even more cumbersome than we had anticipated.”
The cost of protecting Iceland’s sovereign bonds from non- payment increased last week, according to CMA DataVision prices in New York. Credit-default swaps on the nation’s debt rose 37 basis points last week to 543.58 basis points. A basis point is 0.01 percentage point.
Government Collapse?
“The increasing sovereign risk in countries such as Iceland and Greece in Europe will very likely impact the European-based lenders and I could also see it having a spillover effect on some of the U.S. banks,” said Brayan Lai, a Hong Kong-based credit analyst at Calyon. “If that’s the case, the recovery phase is going to be more protracted than people initially thought.”
The so-called Icesave bill, which allows the government to guarantee a $5.5 billion loan from the U.K. and Netherlands to repay depositor claims, is due to be put to a referendum by March 6. Most polls since Jan. 5 show Icelanders will reject the legislation, which lawmakers passed 33 to 30 on Dec. 30.
The political strain of any failure of the accord with the U.K. and Dutch may be too much for the government to survive, Kraemer said.
‘Centrifugal Powers’
“The cohesion in the coalition is superficial in the sense that it’s forced upon the coalition because they have so few options,” Kraemer said. “But the centrifugal powers may just get the upper hand here.”
Some members of the Left Greens, the junior coalition partner, don’t want Iceland to continue its cooperation with the IMF. Members of the Left Green’s ruling committee on Jan. 15 put forward a motion to drop the IMF-led bailout, though the party rejected the call in a vote the next day, state broadcaster RUV reported.
The Left Green Party, headed by Finance Minister Steingrimur Sigfusson, is also opposed to European Union membership. Prime Minister Johanna Sigurdardottir has said Iceland needs to join the EU, with euro adoption an ultimate goal, to avoid a repeat of its financial collapse.
No Cross-Border Deal
Grimsson’s decision has interrupted government efforts to resurrect the economy, which buckled in October 2008 under the $80 billion debt burden amassed by its three biggest banks. Sigurdardottir’s coalition of Social Democrats and Left Greens has spent almost a year trying to settle creditor claims and rebuild Iceland’s banking system. A U.K. and Dutch depositor settlement was the final milestone needed to normalize Iceland’s international relations.
Grimsson said in a Jan. 14 interview that his decision to block the bill will leave the economy unscathed, because an earlier accord will take effect. That bill, which he signed in September, was rejected by the U.K. and Netherlands.
“There is no cross-border agreement” if the current bill is voted down in a referendum, Kraemer said. “The external financing complementing the IMF stand-by agreement may not be in place, because the Nordic governments had made future disbursements contingent on the resolution of Icesave. That’s where it all ends. Basically if the program were to collapse because there’s no resolution, then the external financing conditions for Iceland could become quite precarious.”
Nordic ‘Common View’
The “common view” of Sweden, Norway, Finland and Denmark on the status of their $2.5 billion loan after Grimsson’s de facto veto of the Icesave bill is that continued disbursement of the loan “would require that Iceland complies with its deposit guarantee scheme obligations,” Dorte Drange, a spokeswoman at Norway’s Finance Ministry said in an e-mailed response to questions.
“If the Nordic governments were to conclude that the June legislation does not satisfy their expectations because of its unilateral nature, the IMF loan would have to be renegotiated,” Kraemer said. “That creates a huge amount of uncertainty. The surprising non-signature of President Grimsson gives the indication that one should possibly expect the unexpected.”
To contact the reporter responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net
Last Updated: January 18, 2010 05:59 EST
