- Republic of Iceland Outlook To Negative On Macroeconomic Imbalances; Ratings Affirmed

FRANKFURT (Standard & Poor's) Nov. 20, 2007--Standard & Poor's Ratings Services
said today it revised its outlook on the sovereign credit ratings on the
Republic of Iceland to negative from stable. At the same time, the 'A+/A-1'
foreign currency and 'AA/A-1+' local currency issuer credit ratings were
affirmed. 

The outlook revision reflects the continued build-up and persistence of
macroeconomic imbalances in the Icelandic economy, compounded by an
insufficiently tight fiscal policy. Although the central bank's short-term real
interest rate has risen to over 8%, the effectiveness of monetary transmission
is constrained by the rapid rise in foreign currency borrowing by households,
and the weak reaction of mortgage rates to monetary tightening. 

A renewed surge in consumption and delayed export growth imply that the current
account deficit will not fall as quickly as previously expected. Continued
strong mortgage lending is further driving up housing prices, interrupting the
downward trend in inflation. This has prompted the central bank to again raise
its policy rate to 13.75% in November 2007. 

	Economic growth has remained high during the recent investment, credit, and
real-estate booms, but is set to slow considerably as the economy cools off.
Considerable downside risks to economic growth remain and could emanate from
nominal adjustments in the exchange rate, the property market, or the credit
market. 
  
	Public finances improved considerably during the economic boom, with general
government surpluses averaging 5.6% of GDP over 2005-2007. Together with
sizable privatization receipts, this will help push net general government debt
to below 10% of GDP in 2007, from 38% in 2003. At the same time, however,
contingent liabilities from the financial sector have grown rapidly, due to
fast growth in domestic credit. 

	The negative outlook reflects the increased risk of a hard landing for the
Icelandic economy. The economic slowdown currently under way will facilitate an
unwinding of macroeconomic imbalances, but the process is likely to be impeded
by the planned rapid acceleration in public expenditure, as well as sustained
failure to reform the HFF. In combination with high and rising domestic and
international interest rates, this exacerbates the risk of a hard landing for
the Icelandic economy. 

	"The ratings could be revised downward should a disorderly unwinding of
imbalances take place, affecting public finances as government deficits
increase and contingent liabilities materialize," said Mr. Stukenbrock.
"Conversely, should imbalances unwind in an orderly fashion and the concomitant
risks be contained, the outlook could revert back to stable."