Seðlabanki Íslands - Company Announcement

- Moody's: Iceland's Aaa ratings at a ‘crossroads'

Iceland's Aaa ratings are at a crossroads, according to Moody's Investors
Service in a new special comment. The report does not announce any change in
ratings. 

In Moody's view, Iceland compares favorably to many other advanced industrial
countries also rated Aaa, given its low government debt, consensus-based
political system, and well-functioning institutions.  However, the Icelandic
government is also potentially more vulnerable to a confidence crisis than
other Aaa-rated sovereigns because of the country's large, internationalized
commercial banks. 

“Iceland enjoys high per capita incomes, well-developed political, economic and
social institutions, favorable demographics and a fully-funded public pension
system,” says Moody's sovereign analyst Joan Feldbaum-Vidra, author of the
report.  “Its government debt ratio is less than half the average of the
Eurozone member countries.” 

Still, the decidedly more challenging situation in the global financial markets
has not left the highly leveraged economy unaffected, as the recent widening of
funding spreads reveals. The continued international expansion of the Icelandic
commercial banks has caused the government's contingent liabilities to rise
above normal comfort levels. 

Moody's report explains in detail the rationale for Iceland's Aaa sovereign
ratings, and examines the government's and the banks' ability to weather a
stressful scenario. 
 
“According to Moody's analysis, the Icelandic authorities would likely be able
to fend off a liquidity crisis, protect depositors, and avoid payment
disruptions, even in a quite extreme scenario,” said Feldbaum-Vidra. “However,
Moody's has been watching carefully the growth in the banking system's foreign
currency liabilities over recent years. Eventually, this expansion would
stretch the authorities' ability to manage a crisis, at least in a way that
would be compatible with the current Aaa ratings.” 
 
She said the breathing room for the government to absorb the impact of any
future crisis might be provided by a tighter regulatory framework governing
banks' own liquidity, or other structural measures that would reduce the burden
of the Icelandic authorities' lender of last resort function in foreign
currency. 

"Any such changes would tilt the balance of financial risks for the Icelandic
government in a more favorable direction,” said Feldbaum-Vidra. 
 
The report is titled, “Iceland's Aaa Ratings at a Crossroads.”

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Attachments:

iceland sc2008.pdf