Back from the brink: Iceland and Ireland
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Euromoney Country Risk

Back from the brink: Iceland and Ireland

Iceland and Ireland are on the road to recovery, while Portugal, Italy and Spain plunge further into economic malaise, according to analysts participating in Euromoney’s Country Risk Survey.

Ireland and Iceland both climbed one place in the ECR global rankings in Q2 2012, despite much of southern Europe receiving hefty score declines in the second quarter.Their improvement in the ECR survey coincides with market consensus, after the cost of insuring Irish and Icelandic debt against default declined during the course of last year, according to data provider Markit.


With a global rank of 42 and an ECR score of 57.8, Ireland sits in the upper bound of tier three – countries in this tier score between 50 and 64.9 – which can be equated with a credit rating of BB+ to A-.

Iceland is in 43rd position globally, one place below Ireland with an ECR score of 57.3.

Iceland and Ireland’s improvements mark a split with the deteriorating economic fundamentals in the southern eurozone periphery. The split is no more reflected by the changing risk perceptions of these countries in the latest results of the ECR survey (see graph below).

In stark comparison to Iceland and Ireland, Spain has plunged 15 places to 57 in the global rankings since June 2012, while Italy has slipped 12 places in the same period. Portugal’s global rank of 64, meanwhile, is among the lowest in the eurozone – suggesting no end in sight for the beleaguered economy.


Iceland and Ireland’s ranking boosts were underpinned by improving economic fundamentals, after notable economic score increases in both countries. Ireland’s economic assessment improved by 1.3 points during the first half of 2013, while Iceland witnessed a 0.8 score improvement in the economic component of the survey.

Improving economic fundamentals have resulted in Ireland climbing seven places in the ECR global rankings since June last year, while Iceland is up five places in the same period.


Ireland’s bank stability and government finance indicators were among the country’s economic indicators that improved in the first half of 2013, reflecting perhaps the Irish government’s hard-fought battle in reaching an agreement with the ECB to reduce its debt-servicing costs.

The government has been in talks with the ECB since it took office in February 2012 to reach a deal on the country’s bank bailout cost. The liquidation of the Irish Bank Resolution Corporation has allowed the government to restructure these costs, making savings of approximately €20 billion to the exchequer.

Dermot O’Leary, chief economist at Goodbody Stockbrokers and a member of ECR’s expert panel, says the deleveraging of the Irish banking sector is making progress but there is still a long way to go to get it back to full health.

“The banks still have a problem with the legacy loans associated with the construction sector, which is putting a massive constraint on the banks’ ability to lend, so the mortgage problem is still the biggest problem the Irish economy faces at the current time,” he says.

“De-leveraging in an economy happens over a long period of time, especially when you don’t have debt write-down or rigorous economic growth.”

However, O’Leary notes the improvements in the labour market and the government’s progress in boosting growth appear to be the main reasons behind Ireland’s improved risk assessment during the first half of 2013.

“Ireland has had three consecutive quarters of employment growth,” he says. “Employment is in positive territory on an annual basis as well: the unemployment rate has gone from a peak of 15% to just below 14% and that has happened over the last five to six quarters.

“It is expected to be a slow recovery but it is certainly going in the right direction.”

In terms of government efforts to boost growth, he adds: “There have been a number of different initiatives mentioned [by the government] in relation to the labour market, structural reforms and in relation to some infrastructure projects.

“But it is the case that capital spending is actually still coming down, so the government is very constrained in what it can do by itself to stimulate growth.”

Meanwhile, Iceland’s completion of the country’s IMF programme has boosted its economic assessment, after improvements across all five of the country’s economic indicators in the first half of 2013.

Iceland’s mega post-crisis adjustment appears to have a made a positive impact on the country’s economic outlook. The Icelandic economy is forecast to grow by an average of 2% annually from 2013 to 2016, according to a report by S&P.

Hafsteinn Gunnar Hauksson, economist at Arion Bank, says the improvements in the banking sector are assisting the country’s long-term economic growth trajectory.

“The banking sector has stabilized very nicely in the wake of the crisis and restructuring of both household and corporate debt has brought down default rates, and the largest banks have very healthy liquidity and capital buffers,” he says.

“They have cap ratios of up to 25%, so they’re in a good position to withstand external pressure.”

Similar to Ireland, Iceland is tackling unemployment and looking at ways to boost net FDI inflows.

“The government’s number-one priority will be to boost investment,” says Hauksson. “The Icelandic government is following a pro-business strategy, by putting taxation reform at the top of its agenda, so if they follow through with these policies it should contribute to more investment in the country and, therefore, sustainable growth.”

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

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