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Moody's raised its outlook on Iceland's Baa3 debt rating to stable from negative Thursday, citing the court ruling in its favor over the long-running Icesave bank case.
Moody's said the European Free Trade Association court's decision in January that Iceland does not have to use taxpayer money to pay off Dutch and British depositors in the failed Icesave, "frees the Icelandic government of the potentially large costs related to the Icesave dispute with the British and Dutch governments."
Icesave, the online British arm of Icelandic bank Landsbanki which had 340,000 Dutch and British account-holders, went under when tiny Iceland's bloated financial sector collapsed in 2008 and the country was pushed to the brink of bankruptcy.
The Hague and London had to step in and shell out 3.9 billion euros ($5.2 billion) to compensate Dutch and British account-holders.
Any claims now have to be directed at the remaining assets of Landsbanki.
"The EFTA Court decision is the most favourable possible outcome for the Icelandic government and removes a key negative event risk for the sovereign," Moody's said.
Moody's also praised the government's progress in improving its financial situation as it exits its International Monetary Fund bailout.
"The Icelandic economy has clearly emerged from the crisis-induced recession and is now expanding at a reasonable pace. Moody's expects real GDP growth at around 2.5 percent this year."
"Concerns that the government might not maintain a strict fiscal consolidation path after the termination of the IMF program have lessened significantly as it has continued to reduce the budget deficit, albeit at a somewhat slower pace than agreed with the IMF."