Moody's Says Iceland
Iceland will keep its Aaa rating and a stable outlook when Moody's publishes its next note on the sovereign debt, even as a ``hard landing'' looms, said the agency's credit analyst for the country, Joan Feldbaum-Vidra.
``Even if there's a hard landing, which seems quite a possible scenario, we're very comfortable with our rating and outlook,'' Feldbaum-Vidra said in an interview from New York yesterday. ``There's not a risk of a downgrade. This is an economy that's used to extremes, that's very flexible.''
Moody's Investors Service rates Iceland higher than both Fitch Ratings Ltd. and Standard & Poor's, which last week cut its outlook on the rating to negative. Both Fitch and S&P give the sovereign an A+ rating, citing a current account deficit that ballooned to 26 percent of the economy last year, external debt at five times the size of the economy and inflation that has remained above target every month since April 2004.
The currency gained 0.2 percent against the euro to trade at 93.35 as of 11:41 a.m. in Reykjavik after having lost as much as 0.8 percent earlier in the day.
``If Moody's comes out and says we're actually not concerned, it's quite a bit of a relief,'' said Beat Siegenthaler, a senior strategist at TD Securities Ltd. in London.
``The economy appears to be overheating and that's fueling massive imports,'' said Feldbaum-Vidra. ``There could very likely be a hard landing, including a contraction in gross domestic product, in consumption and asset prices.''
The central bank has lifted the benchmark interest rate to 13.75 percent and the ``hiking cycle is probably not over,'' she said. Policy makers announce their next rate decision on Dec. 20.
The krona has fallen 9 percent against the euro since the central bank last raised interest rates on Nov. 1.
The central bank has borne ``the brunt of the action'' in trying to cool the economy, Feldbaum-Vidra said. ``There's an over-reliance on monetary policy in Iceland.''
The coalition government has cut taxes and will target further reductions to ``keep the economy competitive,'' Finance Minister Arni Mathiesen said on Nov. 15. The government has also raised investments in infrastructure at a time when unemployment stands at 0.8 percent and wage growth is at 8.1 percent.
Moody's will stick to its rating and outlook because the banks, which represent 85 percent of the country's gross external debt, have improved their financial position, while the government maintains a fiscal surplus, Feldbaum-Vidra said.
``It seems that Moody's understands Iceland,'' said Ludvik Eliasson, an economist at Landsbanki Islands hf, Iceland's No. 2 lender. ``They've been with us for a long time and seem to have grasped how things function here.''
Increases in customer deposit-to-lending ratios at the country's biggest lenders Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf as well as secured funding for at least a year has bolstered the financial industry.
At the same time, banks have expanded beyond the borders of the $16 billion economy, broadening their revenue sources.
``The banks have more diversified income streams, foreign currency obligations taken on by the private sector are largely naturally hedged,'' Feldbaum-Vidra said.
A so-called hard landing would probably hit Iceland in 2009, and the central bank's forecast of a 2 percent economic contraction that year ``is a likely scenario,'' Feldbaum-Vidra said.
Moody's last changed its rating on Iceland in October 2002.
To contact the reporter on this story: Tasneem Brogger in Copenhagen at