London: Iceland's recession will last "well into" this year and a recovery is threatened by the island's failure to date to settle a depositor dispute with the UK and the Netherlands, Moody's Investors Service said.
The rating service, which raised the outlook on Iceland's Baa3 rating to stable on April 23, said the credit grade balances the "fragile economic stabilisation and gradually improving fiscal situation against the external vulnerabilities," in the credit report published yesterday.
Iceland's economy contracted a record 6.5 per cent last year after the failure of its three biggest banks in October 2008 resulted in an 80 per cent crown slump against the euro in the offshore market.
The government of Prime Minister Johanna Sigurdardottir has been trying to rebuild the economy, with the resolution of foreign depositor claims representing the final milestone needed to restore relations with international investors.
"Fiscal tightening and weak investment will cause the recession to linger well into 2010," Moody's analyst Kenneth Orchard said in the report. "The recovery is also threatened by the continued failure to reach an agreement over the terms of repaying the UK and the Netherlands for their citizens' deposits."
