Better Than Euro Area Not Enough To Escape Junk Status - The Reykjavik Grapevine

Better Than Euro Area Not Enough To Escape Junk Status

Published October 28, 2011

Despite decreasing unemployment, slowing inflation, and showing an even lower risk for default that the euro area average, Fitch Ratings says it is still not ready to lift the junk status on Iceland’s credit grade.
Iceland’s economy, while far from stellar, has been showing significant signs of recovery. Inflation has slowed for the first time since January, unemployment has been decreasing slightly, and Bloomberg reports that “the island emerges from its crisis with faster economic growth, smaller deficits and lower unemployment than the average for the 17 euro nations.”
Despite this, Fitch Ratings Senior Director Paul Rawkins is not yet ready to lift the junk status on Iceland’s credit grade. To do that, Iceland needs to address private sector debt and unwind controls on the crown.
“The ratings aren’t driven by CDS prices,” Rawkins said. Outlooks on ratings “generally are meant to have a lifetime of about two years on the whole. That doesn’t necessarily mean that the next step would be up to an investment grade; it’s more likely that the next step would be up to a positive outlook.”
In order to bring its rating back up, Iceland’s banks need to make further steps to relieve the debt burden on Icelandic households and private businesses.

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