Moody’s takes ‘wait and see’ approach to Iceland rating

The Governor of the Central Bank of Iceland says that the Moody’s ratings agency has confirmed it will hold off on re-evaluating Iceland’s sovereign debt rating following Saturday’s Icesave referndum. He has also asked the other major ratings companies to hold judgement.

A lot hangs in the balance, RUV reports — including finance for the new Budarhalsvirkjun hydro power station.

Moody’s had previously said that its Iceland credit rating would be immediately re-evaluated if the country voted ‘no’ in the referendum; and that it would probably be lowered. The Icelandic government was fearful that such a downgrade would make foreign finance, including for public works projects, a lot more expensive. That is one of the reasons the government was hoping for a ‘yes’ vote. A large chunk of the money for Budarhalsvirkjun is coming from the European Investment Bank on the understanding that Iceland’s credit rating remains the same (or better) than now.

Mar Gudmundsson, governor of the Central Bank of Iceland, says that his staff have been in regular contact with the ratings agencies over recent weeks, urging them to move carefully and slowly. The negotiations appear to have worked: “Moody’s has, for example, decided to do nothing until at least after next weekend because we have arranged a meeting with them in Washington on Sunday. I also have good hope that we will maybe get a little more time from the others,” Gudmundsson told RUV yesterday; specifically naming Standard and Poor’s.

The central bank head and Iceland’s commerce minister will meet Moody’s representatives in Washington this weekend while in the USA for meetings with the IMF. Mar Gudmundsson believes the talks with Moody’s could be very important. “We are currently what is called ‘investment grade’, both with Moody’s and Standard and Poor’s and it is very important to try and remain so; because otherwise it would be more difficult to secure loan funding for the government and other agencies on the international markets. We are in the so-called speculative grade at Fitch Ratings,” Gudmundsson said.

Iceland lost its investment grade badge at Fitch in 2010 when the Icesave II agreement was rejected by voters. Gudmundsson admits he has little hope that Fitch is about to upgrade the country again; but said he hopes the other agencies will look favourably on the positive economic developments taking place in Iceland.