Sigrún Davíðsdóttir's Icelog

For a long time Iceland didn’t know anything but A from the credit rating agencies. As so many other things the As evaporated with the banking collapse in October 2008. Lately, everything has been going swimmingly for the Icelandic economy except the A rating has proven to be elusive. Now, Moody’s has fixed that: Iceland is back to A3, outlook stable. Icelandic politicians and central bankers will nod approvingly, they feel the A should have been there a while ago; the only group, which might feel perplexed are the offshore króna holders who think they are being short-shrifted in spite of the boom.

Icelandic politicians and central bankers feel that Iceland has been doing much better than reflected in the rating agencies’ ratings. This is partly acknowledged by Moody’s (emphasis mine):

Iceland’s rating trajectory has lagged the improvement in some of its core fundamentals since the financial crisis, because of the residual risks posed to economic and financial stability by the complex process of removing the capital controls first imposed in 2008. The second driver for the upgrade of Iceland’s government rating to A3 at this point in time reflects Moody’s expectation that the phasing out of capital controls will proceed smoothly to completion and therefore not disrupt economic and financial stability.

Moody’s argues that Iceland now is far into liberalising the capital controls – the third step, lifting controls on Icelanders and Icelandic entities, is now in sight, having been announced recently. As I pointed out recently, the lifting now longer seems to capture Icelanders, the announcement went largely unnoticed.

As to offshore króna holders Moody’s isn’t worried either:

The first two stages of the liberalization process are now complete. The resolution of the failed bank estates was completed in late 2015. In June 2016, the central bank auctioned part of its FX reserves for ‘offshore krónur’ (mainly non-resident-owned ISK assets trapped when capital controls were imposed in late 2008 at the time the old banks collapsed), thereby further reducing the overhang of such assets. Moody’s view is that while the few remaining holdings of offshore krónur are sizeable at 8% of GDP, the event risk they pose for Iceland’s external position is limited. The liberalization of capital controls on residents will begin immediately following parliamentary approval of the relevant legislation. A further easing of controls on residents is scheduled to take place on January 1, 2017.

If the offshore króna holders thought the rating agencies would favour their points of view, inter alia interpreting the offshore króna measures as a selective default as has been heard from the offshore króna holders, or would be likely to calculate litigation as a risk, that doesn’t seem to be the case. In Iceland, things are going swimmingly, the economy is booming and at long last Moody’s as the first of the rating agencies has acknowledged it. So far, so good.

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