IceSave, capital controls still loom despite Fitch upgrade of Iceland

Fitch has issued a raft of upgrades on Iceland’s sovereign short and long term debt, but stressed that the country’s impressive economic recovery remains under threat from the cost of bailing out IceSave depositors and the challenge of managing a lifting of capital controls.

Iceland faces the EFTA Court in regards to its handling of gurantees of deposits in IceSave, the deposit savings business that was part of failed Landesbanki. UK and Dutch depositors in particular saw billions of euros of deposits under threat. If the Court rules against Iceland, it could add immediately add debt to the country’s books worth between 6-13% of GDP.

Capital controls were imposed to stop a flight risk. Fitch estimates that there is up to $4bn worth of assets belonging to non-residents in the form of Icelandic krona-denominated public debt and deposit instruments. Because of the risk these could be pulled out of the country immediately it becomes possible, Fitch adds that it is unlikely there will be any near-term change in the controls policy.

The capital controls have been reported on in depth previously by InvestmentEurope.

That said, the rating agency raised its long-term foreign currency Issuer Default Rating (IDR) to ‘BBB-‘ from ‘BB+’.

It affirmed its long-term local currency IDR at ‘BBB+’. Its Short-term foreign currency IDR was upgraded to ‘F3’ from ‘B’ and its Country Ceiling to ‘BBB-‘ from ‘BB+’. The outlooks on the long-term ratings are ‘Stable’.

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