While Iceland’s battered credit rating comes under further pressure, Greece finds it has its back to the wall over the recently agreed rescue deal.
Moody’s, the rating agency, has now cut its outlook on Iceland’s sovereign debt from stable to negative. Iceland’s credit rating already stands at BAA3, which is a full nine steps below the coveted AAA status. One step lower takes Iceland out of the ‘investment grade’ bracket and into the speculative grades or ‘junk’ status of Ba1 and below.
Several of Iceland’s banks were ruined by the recent credit crisis, but they did manage to secure an IMF rescue package to raise funds, which they hope to use to get themselves back on their feet and get back into the international money markets. But the UK and Netherlands are blocking the IMF deal until Iceland pays the cost of compensating UK and Netherlands depositors who lost their money in the Icelandic banking collapse.
The Icelandic people in March voted with a huge majority to withhold compensation money for the UK and Netherlands.
This stand-off threatens Iceland’s recovery.
After rumours that Greece wanted to renegotiate its proposed rescue package there was a sudden rush to sell off Greek sovereign debt that saw yields driven up to 7.1%. The difference between the German benchmark and Greek debt now stands at 4.08%, which is a record. The cost of insuring against Greek debt default also rose significantly.
The rate of the debt sell off has raised concerns that Greece may not be able to raise the money to refinance all of its â‚¬23 billion debt that matures over the coming months.
The news sent the Euro down 0.8% against the dollar.
It has emerged that Greece is laying plans to go to the US bond market. It is felt that investors there will have more of an appetite for higher yield, higher risk bonds than the European market does.
Many people see the only way out for Greece as massive public sector cuts and the freezing of pensions, as there is no other way of servicing this debt for very long at these eye-watering rates. But the people of Greece seem very keen to maintain their current way of life. There are also reports that over the first 2 months of 2010 some â‚¬8 billion of company and individual wealth was moved offshore from Greek banks.
The Greek population stands at about 12 million, with Iceland’s at only 320,000, but both countries seem to be having a huge affect on both European and global finances.