Moody’s downgrades Iceland’s ratings outlook on Icesave | FT Alphaville

Moody’s downgrades Iceland’s ratings outlook on Icesave

The prospects for Iceland were looking slightly bleaker on Tuesday, as Moody’s downgraded the country’s ratings to negative from stable on “uncertainty over external liquidity”.

Moody’s said the country’s recovery was also threatened by delays in the resolution of the country’s Icesave dispute.

To remind readers, Iceland still owes Britain £2.3bn stemming from the collapse of  the country’s Landsbanki bank and has not as yet settled upon a repayment programme.

As Moody’s highlighted on Tuesday (our emphasis):

“The recovery of the Icelandic economy is threatened by the delays in the resolution of the Icesave dispute, which constitutes an obstacle in the resumption of official and private financial flows into the country,” says Kenneth Orchard, Vice-President/Senior Credit Officer in Moody’s Sovereign Risk Group.

The negotiations with the UK and Netherlands over Iceland’s reimbursement of Icesave depositors may yet yield a more favourable outcome for Iceland’s public finances compared with the previous agreement, according to the analyst. Still, the level of uncertainty generated by such protracted discussions is harmful to short-term economic and financial prospects.

In this context, while there are no immediate payment concerns, Moody’s notes that the stalled negotiations have created some risk that the government may not be able to re-finance its December 2011 and May 2012 eurobonds in the international capital markets.

“The central bank is projected to have sufficient resources to repay the issues when they mature and, in fact, the central bank has been actively buying the issues in the secondary market,” Orchard remarks. “However, there is some doubt whether the size of the buffer that would exist following repayments would be consistent with an investment grade sovereign rating.”

The unresolved nature of the dispute has over the year understandably attracted a number of groups to the country touting possible solutions to the nation’s economic woes.

Among them has been whistleblower website Wikileaks, which hatched a plan last year to rebuild the country as an investigative journalism haven.

As reported back in March, Wikileaks helped to draft the Icelandic Modern Media Initiative (IMMI) proposal, the goal of which was to “task the government with finding ways to strengthen freedom of expression around world and in Iceland, as well as providing strong protections for sources and whistleblowers”.

Although an interesting idea, it was hardly focused on resolving the Icesave dispute directly.

A plan by Gijs Graafland, however, was.  As the Independent reported last week, the director of the Amsterdam-based Planck Foundation is pushing for creditors to be paid back in green electricity instead of cash.

As the UK daily wrote:

Mr Graafland’s “Energy for Debt” plan calls for treating kilowatts as currency. Iceland and its 320,000 inhabitants get all of their electricity from carbon-free sources, including geothermal and hydroelectric.

Like other energy observers, Mr Graafland believes there is huge potential in the country’s largely untapped sources of geothermal power – heat form the earth which can be used to drive turbines. Iceland straddles the fault line between the North American and Eurasian tectonics plates, giving it plenty of geological action. He said: “A massive energy transition investment wave can help prevent a collapse from peak oil, and this can also help save the financial system.”

The idea it seems would involve a type of unitisation of energy take place, with institutions dealing in renewables-based kilowatts instead of cash.

In fact, the proposal seems similar to one touted on a much wider scale by energy campaigner and former director at London’s International Petroleum Exchange, Chris Cook.

Nevertheless, while it will be interesting to see whether the idea gains momentum in the absence of a cash-based resolution, it’s worth noting that neither the Icelandic or UK government are currently keen on linking future loan agreements to natural resources, according to the Independent.

No mention of the plan in Moody’s outlook, either.

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