Iceland's Banking Takeover Triggers Credit-Rating Reductions

By Lester Pimentel

Oct. 1 (Bloomberg) -- Credit-rating companies are turning negative on Iceland after the government bailed out the island nation's third-biggest bank amid a growing global financial crisis.

Within a 24-hour span, Standard & Poor's and Fitch Ratings lowered the country's rating and Moody's Investors Service put its Aa1 rating on review for a potential downgrade. Fitch yesterday lowered the country's long-term foreign currency rating to A- from A+, and said the rating remains on review for another cut. On Sept. 29, S&P reduced Iceland's foreign-currency debt rating one level to A- and also said it may lower it further.

Iceland said on Sept. 29 it will take a 75 percent stake in 104-year-old Glitnir Bank hf by investing 600 million euros ($859 million) after the firm's short-term funding dried up. The rescue followed a string of bailouts in Europe in the wake of a worldwide credit squeeze that's caused banks more than $550 billion in losses and writedowns.

``With the recent unprecedented global credit tightening and the crisis management response put in place all over the world, the risk that some of Iceland's banking system liabilities would migrate onto the balance sheet of the government materialized with the government's capital infusion into Glitnir,'' Moody's analyst Joan Feldbaum-Vidra said in a statement.

Glitnir and Kaupthing Bank hf, Iceland's biggest bank, have funded lending for acquisitions and other investments in northern Europe by borrowing in money markets rather than by using customers' deposits.

Krona Tumbles

Iceland's krona has tumbled 11 percent this week to 106.06 per dollar, making it the biggest decliner in the world. It has fallen more than 25 percent over the past three months.

The cost of insuring against a default by Iceland rose to a record after the bailout of Glitnir. Five-year credit-default swaps on the country's debt climbed 18 basis points to 5.87 percentage points at 5:40 p.m. in New York, according to CMA Datavision prices. That means it costs $587,000 to protect $10 million of the country's debt from default. A month ago, it cost $256,000.

Credit-default swaps are contracts used to speculate on a country or company's creditworthiness. An increase in the cost of protection indicates a perceived deterioration in credit-quality.

Moody's also cut Glitnir's rating to Baa2 from A2 yesterday while putting the ratings of Kaupthing and Landsbanki Islands hf on review for downgrade. S&P reduced Glitnir's rating to BBB from BBB+ on Sept. 29. Fitch lowered its credit ratings on Kaupthing, Glitnir, Landsbanki Islands hf and Straumur Burdaras Investment Bank hf.

``The risks to macroeconomic stability and sovereign creditworthiness arising from distress in the banking system have materially increased,'' Fitch Ratings Director Paul Rawkins said in a statement.

To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net;