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Friday, Moody's Investors Service said that the breakdown in the talks between the governments of Iceland, the United Kingdom and Netherlands to resolve the Icesave dispute added downward pressure on the Icelandic government's Baa3 rating.
Moody's assessed that the failure to reach a new agreement would possibly lead to an extended delay of the IMF programme and a weaker economic recovery. According to Moody's, Iceland's path out of the crisis appears more difficult.
The renewed talks to reach a new agreement on Icesave were required because intense popular opposition to the earlier arrangement had prompted Iceland's President to refuse to sign the legislation in early January, Moody's said. The Icelandic government announced that it will hold a referendum on the previous agreement on March 6. However, the rating agency said opinion polls suggest that the agreement will be voted down by a wide margin.
"A rejection of the agreement would also prolong the uncertainty surrounding the economic and political outlook, and threaten to derail the nascent recovery," said Kenneth Orchard, Vice President - Senior Credit Officer in Moody's Sovereign Risk Group. The rating agency added that government's budget deficit and debt affordability indicators are among the worst of any investment grade-rated sovereign.
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