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Moody's: Outlook changed to negative
  Credit rating agency Moody's Investors Service has changed the outlook for the Republic of Iceland's sovereign credit rating from stable to negative. In its press release, the agency states cites the uncertainty stemming from the Supreme Court judgments on exchange rate-linked loans and the lack of a resolution of the Icesave dispute as the reasons for the change. It goes on to say that the Supreme Court judgments create the risk that the State will have to provide further support for the banking system as a result of potential losses on foreign-denominated loans, which in turn would reduce the likelihood that the Treasury could fulfil its financial obligations. The sovereign credit rating for long-term obligations in foreign and local currency is Baa3, Moody's lowest investment-grade rating.
The change in the outlook increases the likelihood that the sovereign will fall into speculative grade in the next 12-18 months. Fitch Ratings has already assigned the Republic of Iceland speculative grade ratings. Clearly, it would be bad news indeed if Moody's were to downgrade the sovereign to speculative grade as well, as junk status would make it difficult for the Treasury to borrow abroad and would undermine market confidence in Iceland. The outlook is negative for the Republic's sovereign ratings from all three of the largest rating agencies, Moody's, Fitch, and Standard & Poor's.
Fitch is worried as well
It will be interesting to see what the other agencies do now. Fitch Ratings also appears concerned about the Supreme Court rulings on FX loans, as Fitch analyst Paul Rawkins said in a recent interview with Bloomberg that the judgments had a negative impact on financial stability in Iceland. In Rawkins' opinion, the Court's decisions will probably delay economic recovery in Iceland. His comments make it quite clear that the Court's judgments do not have a positive effect on Iceland's sovereign credit ratings; however, Fitch has not responded to the judgments by downgrading the Republic or changing its outlook. Actually, Fitch has not been heard from since it downgraded Iceland's foreign-currency obligations to speculative grade (BB+) since early January, when the president of Iceland referred the Icesave agreement to a national referendum.
Sizeable merchandise trade surplus
 The merchandise account surplus for the month of June totalled ISK 8.7 bn. Merchandise exports totalled ISK 48 bn during the month, while imports were just over ISK 39.3 bn. The merchandise trade surplus for the first half of the year amounted to ISK 63.6 bn, much larger than for the same period in 2009, when it measured ISK 39.3 bn. The outlook is for a continuing sizeable merchandise trade surplus, as the prices of Iceland's chief export products have risen sharply since the first half of 2009 and imports of consumer and investment goods look set to remain modest until the economy recovers. We consider it likely that the merchandise account surplus will exceed ISK 100 bn this year, as opposed to a surplus of ISK 90.3 bn in 2009. This year's surplus could range between 7% and 8% of GDP, as compared with last year's figure of 6%.
Unusually sizeable investment product imports in June
It is interesting to note that investment product imports accounted for over a fourth of all goods imported in June. Imported investment products amounted to ISK 10.2 bn, the largest total in a single month in the history of Statistics Iceland (SI) measurements. It appears paradoxical that such a record should be broken at the bottom of a recession, when investment is at a low ebb. It should be borne in mind, however, that the depreciation of the króna skews the picture and that investment product imports were probably much larger in volume terms during the pre-crisis upswing. In the first half of the year, imports of investment products increased by about 80% year-on-year at constant exchange rates, but the comparison period was unusually sluggish in terms of investment imports. Nonetheless, the increase suggests that the economy may be rallying a bit.
Export values rise
In ISK terms, export values were higher in June than ever before. They hit an all-time high for the first half of the year as well, totalling ISK 277.4 bn for the period, due to substantially higher aluminium prices and somewhat higher marine product prices in the first half of 2010 than in the latter half of 2009. The ISK has appreciated as well. Export values have risen in all major product categories, led by industrial products and aluminium, thanks to relatively high aluminium prices. Aluminium production in Iceland has remained stable, however, since the Alcoa Fjarðaál aluminium smelter reached full capacity and the expansion of the Norðurál smelter at Grundartangi was completed in the winter of 2007-2008. Marine product exports have also been robust so far in 2010, with values rising by 12.4% year-on-year.
Corporate bankruptcies rise in H1/2010
 According to figures published by Statistics Iceland (SI) this morning, 548 firms were declared bankrupt in the first six months of the year, an increase of 8% year-on-year and 40% compared with the first half of 2008. In comparison, it is worth noting that the number of corporate bankruptcies during the first half of the current year equals or exceeds that for the period 2005-2006, when bankrupt firms averaged 545 per year. This trend is a sign that business and operational conditions are still extremely difficult in the Icelandic economy. Most of the companies that have failed in 2010 - or one-fourth of all bankruptcies -are in the building and construction sector.
A total of 93 firms began bankruptcy proceedings in June, as opposed to 95 in June 2009, which corresponds to a decline of 2% year-on-year. 150 new private limited companies were registered in June, as opposed to 237 in June 2009, a decline of 37%. The decrease year-to-date amounts to about 32%, as 900 private limited companies have been registered during the period, as opposed to 1,320 a year ago.
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OMX ICEX, 7/29/2010
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| Category |
Volume |
| Bonds |
104 |
| Equities |
8,985 |
| Total |
9,089 |
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REIBOR Market, 7/29/2010
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| Term |
REIBID |
REIBOR |
| O/N |
6.50% |
7.00% |
| SW |
7.00% |
7.50% |
| 1M |
7.10% |
7.50% |
| 3M |
6.80% |
7.05% |
| 6M |
6.35% |
6.70% |
| 12M |
6.10% |
6.35% |
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Exchange Rates, 7/29/2010
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| |
pr.ISK |
3m.Libor |
3m.fwd. |
| USD |
120.14 |
0.45% |
1.9 |
| GBP |
187.74 |
0.75% |
2.9 |
| JPY |
1.39 |
0.24% |
0.0 |
| EUR |
156.50 |
0.83% |
2.4 |
| Vt. ISK |
211.91 |
0.85% |
3.2 |
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Currency Crosses, 7/30/2010
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| |
EUR |
GBP |
USD |
| GBP |
0.834 |
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|
| USD |
1.303 |
1.563 |
|
| CHF |
1.357 |
1.628 |
1.042 |
| JPY |
112.842 |
135.367 |
86.625 |
| NOK |
7.953 |
9.541 |
6.106 |
| SEK |
9.429 |
11.311 |
7.238 |
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Icelandic Equities, 7/29/2010 |
| ID |
Vol. |
Yield |
Day.ch. |
| MARL |
95 |
91.00 |
-5.50% |
| OSSR |
8 |
196.50 |
-1.01% |
| ICEAIR |
0 |
3.40 |
-2.86% |
| FO-EIK |
0 |
84.00 |
0.72% |
| FO-BANK |
0 |
144.00 |
0.00% |
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