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Strong growth and financial regulation has helped the tiny island nation make a swift recovery after financial collapse.
The international ratings agency Fitch raised its assessment of Iceland's long-term debt rating from junk to investment grade AFP reported Friday.
Fitch raised Iceland's rating from BB+ to BBB-, signalling that the country's debt is now "investment grade," and boosting hopes that the country returning to a stable financial system.
Iceland's economy was bankrupted in 2008 in what was the largest banking crisis, relative to the size of an economy, that any country has ever suffered.
In a statement reported by the AFP, Fitch said that the decision to raise its assessment "reflects the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness."
"The outlooks on the long-term ratings are stable," Fitch is reported to say.
The International Monetary Fund forecasts growth of 2.5 percent in 2012, a rate that far exceeds most European nations, according to the Associated Press.
Iceland has managed to halt the rise of unemployment and is on track to have its first fiscal surplus in years.
"A promising economic recovery is underway, financial sector restructuring is well-advanced, while public debt/GDP (gross domestic product) appears to be close to peaking on the back of a robust fiscal consolidation program," the report's lead author Paul Rawkins said as quoted by AFP.
Iceland's recovery is an exception to neighboring EU countries in both its swift recovery after the financial crisis but also its exclusion from the euro currency zone.
Last month, Fitch downgraded five eurozone countries citing financial weakness during the debt crisis, according to the BBC.