S&P hikes Iceland's credit rating one notch to 'BBB'

Standard & Poor's announced Friday it had bumped up Iceland's credit rating by one notch to BBB over the prospect of an easing of capital controls and plans to deal with legacy issues from its 2008 financial crisis.

"The upgrade reflects what we view as credible government proposals that will enable the eventual lifting of capital controls, which have been in place since the 2008 banking crisis," said the ratings agency in a statement.

When its oversize banking sector collapsed Iceland nationalised banks and slapped on strict capital controls.

The government has proposed to deal with two major unresolved issues that have been preventing the removal of the restrictions.

One is the claims of the failed banks against Icelanders, which the government plans to tax at 39 percent unless pledges are made not to convert the funds into foreign currencies.

The second is krona-denominated bonds held by foreigners. The government is to propose the bond holders keep krona assets or convert their funds in special currency auctions.

In addition to likely bringing considerable additional revenue to the government, S&P said "...the proposals will address the country's sizable balance-of-payments vulnerability by relieving the latent pressure on the Icelandic krona (ISK) exchange rate."

It added that would boost foreign investor sentiment and help improve access of Icelandic firms to international capital markets.

The ratings hike brought Iceland off the lowest investment grade rating.

Another ratings agency, Moody's, also raised Iceland's credit rating by one notch for similar reasons at the end of June.