We consider that the near-term risks to Iceland's economy have subsided. We believe Iceland's external liquidity will remain weak, but stable, as exchange controls will remain in place and partly compensate for delayed official disbursements. We are therefore affirming our 'BBB-/A-3' foreign currency credit ratings on Iceland. However, prolonged application of foreign exchange controls will, in our view, restrict Iceland's monetary and fiscal flexibility and investment prospects. Consequently, we are lowering our local currency credit ratings on Iceland to 'BBB/A-3' from 'BBB+/A-2'. We are removing all the ratings from CreditWatch where they were placed with negative implications on Jan. 5, 2010. The negative outlook reflects the risk of a downgrade if the Icesave negotiations were to break down, undermining Iceland's
