Iceland still far from default

London: Iceland's government said it's a long way from defaulting on its debt payments after Moody's Investors Service warned it may lower the island's credit grade to junk, arguing lenders could require state support.

Moody's is "taking it too far," Economy Minister Gylfi Magnusson said in an interview on Thursday, after the rating service cut the outlook on Iceland's Baa3 foreign currency debt to negative.

Moody's said it will lower the rating to junk if a June court ruling banning some foreign loans hurts the recovery or forces the government to raise debt levels by bailing out the banks. The rating "is already lower than is merited; saying that the grade could possibly be lowered further is undeserved," Magnusson said.

"The Treasury is far from defaulting."

Junk

Iceland's foreign debt is graded junk by Fitch Ratings, while Standard & Poor's gives the island its lowest investment grade. A June 16 decision by the Supreme Court, banning loans indexed to foreign-exchange rates, may require the state to bail out the banks a second time since 2008, Moody's said. That would add to the government's debt burden, which will reach 150 per cent of gross domestic product this year, the rating company estimates.

"The magnitude of the banking system losses that will result from the recent court ruling is not known at this time but it is clear that Iceland still faces significant risks," said Moody's analyst Kathrin Muehlbronner.

Finance Minister Steingrimur Sigfusson on July 7 said the June ruling may cost Iceland's banks as much as $4.3 billion (Dh15 billion), equivalent to a third of the island's econ-omic output.