Iceland insists it won't default in wake of credit downgrades
Published 07/01/2010 | 05:00
Iceland's Finance Minister Steingrimur Sigfusson said his government won't default after its debt was downgraded to junk because of a presidential veto of a depositor bill that had sought to repair investor relations.
"I don't believe there's anything that points to" Iceland defaulting, Mr Sigfusson said in an interview in Reykjavik yesterday. Even so, "patience toward Iceland is running out. That is a reality we have to face."
Iceland is trying to put behind it the fallout of the banking collapse that garroted its economy 15 months ago. A settlement of the so-called Icesave depositor bill is the last milestone towards the island's financial resurrection.
Failure to pass the bill may jeopardise an international bailout agreement, Economy Minister Gylfi Magnusson said yesterday. The veto has already triggered credit downgrades of the western nation hardest hit by the global credit crisis.
President Olafur R Grimsson vetoed a British and Dutch depositor bill after receiving a petition signed by more than 60,000 of Iceland's 320,000 inhabitants urging him to reject the legislation.
The accord, which obliges Iceland to use $5.5bn (€3.82bn) in borrowed funds to cover the depositor claims, will be put to a referendum. Polls show about 70pc of Icelanders oppose the legislation.
"The status is very difficult," Mr Sigfusson said. "We are concerned about the progress and resurrection of the economy."
An International Monetary Fund (IMF) review scheduled for this month probably won't take place, he said.
Mr Grimsson's decision doesn't necessarily mean an IMF-led rescue would collapse, as long as countries that pledged to finance the emergency loans to Iceland remain committed, Mark Flanagan, the fund's mission chief for Iceland, said. The IMF would consult with countries providing the money for the programme, he said.
The country's $2.5bn loan from the Nordic countries was contingent on resolving the Icesave dispute, Mr Magnusson said.
"We could contemplate a scenario in which we could move forward without the Nordics, but I'm not sure that it would work and I don't recommend that we take that route," he said.
Mr Grimsson's announcement prompted Fitch Ratings to lower Iceland's credit grade to BB+, one level below investment grade. The rating carries a negative outlook.
Standard & Poor's put its BBB- rating on creditwatch negative, indicating "the likelihood of a downgrade if political uncertainty grows and external liquidity pressures persist in the wake of" the Icesave veto.
"This latest setback raises renewed uncertainties over the availability of bilateral and multilateral funding for Iceland's IMF financial rescue programme," Fitch senior director Paul Rawkins said.