A downgrade of Iceland's credit rating would be unjustified now that the country's economy is improving, Finance Minister Steingrimur Sigfusson said on Saturday.

Standard & Poor's said on Wednesday Iceland's credit ratings could be downgraded into junk status after voters rejected a deal to repay Britain and the Netherlands for losses from a banking crash.

In a referendum on April 10, Icelandic voters spurned a deal to provide a state guarantee for repaying more than $5 billion to the British and Dutch for money spent compensating savers who lost money when banking group Landsbanki collapsed in 2008.

I think a downgrade would be very unfortunate and not justified, Sigfusson told Reuters Insider in an interview.

If you look at the underlying strength of the Icelandic economy we are doing quite well. We are resuming economic growth, and we are through the worst crisis. We are on the way up again and a downgrade now would be strange, he said.

The Icelandic minister said Britain and the Netherlands would get their money back through the sale of assets of the failed Landesbanki rather than from the Icelandic taxpayer, but would get it nevertheless.

Substantial amounts will be paid out from the bank, at least one third of the amount will be covered already before Christmas and the latest estimate is that the bank...will be able to deliver...even 100 percent, he said.

He said the money would be repaid in the next one to three years.

Sigfusson said Iceland will not have to tap debt markets for a long time, but did not exclude borrowing on the market to normalize relations.

We are fully financed and we can cover all our payments until 2015, we have sufficient reserves already. So it is more an issue of normalising relations if we were to move to the markets rather than that we are in need of it, he said.

(Reporting by Jan Strupczewski, editing by Leslie Adler)

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