Moody’s raises Iceland’s debt rating outlook back to stable after IMF grants more funds

Moody’s lifts Iceland’s debt rating outlook

LONDON — Moody’s Investor Service lifted Iceland’s ratings outlook back to stable from negative on Friday after the crisis-stricken country received more bailout funds from the International Monetary Fund.

The ratings agency said that the restoration of financing from the IMF and Nordic governments — which was delayed by the so-called Icesave dispute over the repayment of $5.3 billion to Britain and the Netherlands — ensures critical external funding.

“The resumption of official financial inflows into the country should also boost confidence and support the ongoing economic recovery,” said Kenneth Orchard, vice president at Moody’s Sovereign Risk Group.

The decision reverses a downgrade by the ratings agency just two weeks ago on fears that the Icesave dispute and the delay in the delivery of more funds from an agreed $2.1 billion IMF loan would block both official and private financial flows into Iceland.

After a two-month delay, Iceland earlier this week drew $160 million more from that loan, which was agreed in November 2008 to help the country get back on its feet after its banking system collapsed and its currency plummeted.

A multilateral credit line from fellow Nordic governments in Finland, Norway and Denmark, which agreed to provide a further $2.5 billion, was also reinstated.

Moody’s said the measures will provide Iceland with approximately euro700 million in immediate financing. It added that the country should also have access to an additional euro1.56 billion from the IMF and Nordic governments over the next sixteen months.

The agency changed the outlook on the Icelandic government’s Baa3 foreign and local currency ratings to stable from negative. The outlooks on the foreign currency bond and deposit ceilings were also changed to stable from negative.

Iceland, home to the erupting volcano that caused chaos for international flights over the past week, is still struggling to recover from the collapse of its banks within a week in October 2008 and the devastating impact on its economy.

An independent report earlier this month was harshly critical of the country’s former leaders — the government in charge at the time of the financial crisis was ousted after a public outcry.

The Icesave dispute, which involves paying Britain and the Netherlands to compensate their government payments to citizens with accounts in a collapsed Icelandic bank, remains unresolved after Iceland’s government was pushed into a national referendum last month that rejected an agreed deal. Talks to find a new repayment plan are continuing.