A new report by Moody’s Investors Service states that although the situation of Iceland’s commercial banks is worrisome, an economic crisis is unlikely. Minister of Finance Árni M. Mathiesen said the report could spark more positive coverage of Iceland’s economy.
Mathiesen said media reports on the economic situation in Iceland have been developing in the right direction for the past two or three weeks and that Moody’s report is likely to encourage that development further, Morgunbladid reports.
Moody’s has good knowledge of the reality of Icelandic finance and has on an earlier occasion estimated that the state is capable of reacting to potential turmoil among the banks, the minister added.
“The state treasury is almost without debt, which is a great strength for those who work within the Icelandic economy. So it’s important to maintain that position,” Mathiesen said.
Under Moody’s ratings, Iceland is the only country where the state has a credit rating of Aaa while the banks’ financial strength is rated below C. Moody’s lowered their rating from C to C- in February.
However, in Moody’s new report, Iceland’s situation is considered good in comparison with other industrialized countries with the same credit rating.
The evaluation is based on the state treasury’s favorable debt position, high GDP per capita, flexibility of the economy, relatively young average age of the nation and a powerful pension fund system. The state treasury is well prepared to weather a potential economic storm.
But Moody’s also said that Iceland’s economy is vulnerable first and foremost because of the extensive increase in the banks’ international business operations in recent years and because of how high household debt has become.