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Iceland outlook ‘clouded by Icesave veto’

International ratings agency Moody’s said the Icelandic president’s refusal to approve a compensation deal with London and Amsterdam on the Icesave bank collapse complicates his country’s recovery outlook.

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While not downgrading Iceland’s ratings or putting it on notice, as other ratings groups have done, Moody’s Investors Service said the move “has uncertain credit implications but will certainly complicate any near-term plans (for Iceland) to exit from its financial and economic crisis”.

Earlier on Wednesday, Standard and Poor’s put Iceland on CreditWatch negative amid concerns President Olafur Ragnar Grimsson’s veto of the Icesave Act, which provided compensation for British and Dutch savers, could hit ties with the International Monetary Fund.

If it did, “we could lower our ratings on Iceland by one to two notches within a month”, S&P said.

The IMF said the decision would not affect its relations with Iceland.

On Tuesday, Fitch Ratings downgraded Iceland’s long-term debt rating from BBB- to BB+, or junk bond status, citing a “renewed wave of domestic political, economic and financial uncertainty” for the country.

For its part, Moody’s said Iceland was well placed to “weather a period of temporary uncertainty without impact on its current Baa3 rating”.

At the same time, “any indication of renewed political instability and/or serious international pressure would signal real credit concerns and could lead to a negative rating action”, it warned.

The Icesave Act is now subject to a referendum, expected within the next few months.