By Simon Miller

Fitch Ratings has upgraded Iceland to investment grade level four years after the country went bankrupt.

The ratings agency has upgraded Iceland's Long-term foreign currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+' and affirmed its Long-term local currency IDR at 'BBB+'.

Its Short-term foreign currency IDR has also been upgraded to 'F3' from 'B' and its Country Ceiling to 'BBB-' from 'BB+'. The Outlooks on the Long-term ratings are Stable.

Senior director at Fitch's Sovereign Rating Group Paul Rawkins said the uprating reflected the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness since 2008.

He added: "Iceland has successfully exited its IMF programme and gained renewed access to international capital markets. A promising economic recovery is underway, financial sector restructuring is well-advanced, while public debt/GDP appears to be close to peaking on the back of a robust fiscal consolidation programme"
added Rawkins.

As the first country to suffer the full force of the global financial crisis,
Iceland successfully completed a three-year IMF-supported rescue programme in August 2011.

Flexible labour and product markets and a floating exchange rate have facilitated the correction of external imbalances and contained the rise in unemployment, while the financial system has shrunk to one fifth of its former size.

Fitch said Iceland had been among the front runners on fiscal consolidation in advanced economies: the primary deficit has contracted from 6.5% of GDP in 2009 to 0.5% in 2011 and Iceland appeared to be on track to attain primary fiscal surpluses from 2012 and headline surpluses from 2014.

Fitch believed that gross general government debt may have peaked at around 100% of GDP in 2011 (excluding potential Icesave liabilities); net debt is significantly lower at around 65% of GDP, reflecting appreciable deposits at the Central Bank (CBI).

The rating note added: "Iceland's unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness in the face of unprecedented financial sector distress. However, legacy issues remain, notably the protracted dispute over Icesave, an offshore branch of the failed Landsbanki that accepted foreign exchange deposits in the UK and the Netherlands, and the slow unwinding of capital controls imposed in 2008."

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