Fitch finds EFTA Court ruling positive for Iceland credit profile

The European Free Trade Association (EFTA) Court’s decision to dismiss claims that Iceland’s government failed to comply with obligations to depositors in the failed Icesave bank is positive news for the country’s credit profile says Fitch Ratings.

The ruling removes a potential threat to the country’s public finances. At stake were interest servicing costs Iceland would have had to make to the governments of the UK and Netherlands to cover the cost of loans they incurred when they reimbursed depositors in Icesave.

Iceland estimated the costs of this liability to be equivalent to 6.5% of GDP, but IMF estimates were higher, Fitch said, adding that the court decision means it will stick to its forecast that government debt-to-GDP will fall below 70% by 2020, having peaked at 101% in 2011.

“An unfavourable ruling would have slowed the fall in the public debt/GDP ratio,” Fitch said.

More broadly, the ruling also removes the risk of fall-out hitting the economy and exchange rates.

For international creditors it is a positive step forward. But, the country stil retains capital controls, which Fitch said are a major stumbling block to normalising relations with creditors.

“These support the currency and limit the risk caused by currency mistmatches, but they also hold back investment and constrain economic growth. The Icelandic authorities continue to adhere to a conditions-based policy for lifting capital controls, and are exploring new avenues to accelerate the reduction in the overhang of non-resident holdings of krona-denominated instruments.”

Fitch upgraded Iceland to ‘BBB-‘ from ‘BB+’ in February 2012. It currently has an a ‘Stable’ outlook on the country.

 

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