In its annual report on Iceland, Moody’s Investors Service says the country’s Aaa rating and stable outlook are supported by institutional strength, low government debt and a tested ability to withstand shocks.

Iceland’s Aaa foreign currency country ceiling for bonds is derived from the Aaa foreign currency government bond rating, reflecting minimal risk of a government bond default or payments moratorium.

“Iceland is a wealthy, advanced industrialized country that is also in the midst of a major economic diversification initiative that is enhancing the wealth and development of the economy,” said Moody’s Analyst Joan Feldbaum-Vidra, author of the report.

Despite these positive features, she said a number of macroeconomic imbalances have developed, including a fast-growing and high level of foreign currency debt, particularly by the banking system.

“This trend, along with rising world interest rates and changing investor preferences for risk, have raised concern among market participants about the heavy reliance by Icelandic banks on external market funding and the risk of a systemic crisis should they not be able to roll over these obligations,” explained the analyst.

“We feel market concerns about a banking crisis were exaggerated,” said Feldbaum-Vidra. “In Iceland, the external debt buildup has financed high-quality external foreign investments and the banks’ foreign assets and liabilities are very closely matched.”

She said Iceland’s financial system is “well-managed, well-capitalized and adequately liquid, and capable of withstanding sizeable and simultaneous shocks from sharp adjustments in the exchange rate, asset prices and asset quality.”

“In the remote event a banking crisis were to occur, it could be managed by the government which has a very low level of debt, around 22% of GDP, less than half the level of other Aaa-rated advanced economies on average,” said Feldbaum-Vidra. She added that Iceland’s per capita GDP of $50,000 is high even relative to other Aaa-rated countries, indicating a very advanced level of institutional and economic development that is key to its ability to respond to shocks.

Feldbaum-Vidra authored an earlier report on the subject of Iceland’s financial stability in April, “Iceland’s Solvency and Liquidity Are Not at Risk.”

The rating agency’s report, “Iceland: 2006 Credit Analysis,” is a yearly update to the markets and is not a rating action. It is available on www.moodys.com.

No. 28/2006

August 3, 2006