Jun 08 2015
Comprehensive strategy for capital account liberalisation announced
  • ISK 1200 billion problem solved; stability ensured
  • Stability conditions and stability tax on failed banks’ estates
  • Currency auction for holders of offshore ISK in the autumn
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At a meeting held yesterday, the Government of Iceland agreed to present before Parliament two bills of legislation sponsored by the Minister of Finance and Economic Affairs. Together, the two bills lay the foundation for a comprehensive strategy for capital account liberalisation. 

The public interest demands that the capital controls be lifted without jeopardising economic and financial stability. The objectives of the current liberalisation strategy are based on the fundamental principal that the controls must be lifted in stages without upsetting the balance in the economy and without imposing additional financial burdens on the Treasury or the Icelandic people. 

The total value of the assets underlying the problem addressed in the authorities’ strategy is about 1,200 billion Icelandic krónur. The assets fall into three categories: the ISK assets of the failed banks’ estates, which total 500 billion krónur; the estates’ foreign-denominated claims against Icelandic residents, which total 400 billion krónur; and the offshore krónur held by non-residents, which total 300 billion krónur. The authorities’ strategy prevents these assets from flowing into the foreign exchange market and thereby adversely affecting Iceland’s balance of payments. 

Stability conditions and stability tax on failed banks’ estates

The solution to the problem concerning the failed financial institutions’ estates is twofold: stability conditions are introduced and a stability tax put in place. The stability conditions, which have been approved by the Ministerial Economics Committee and the Steering Committee for capital account liberalisation, are intended to prevent adverse effects stemming from distribution of capital. If the estates complete composition agreements by the end of 2015, they can obtain authorisation to transfer funds, provided that they fulfil the stability conditions; otherwise, they will be subjected to the stability tax. The intention is to simplify the rules currently applying to the execution of composition negotiations by means of a bill of legislation amending the Act on Financial Undertakings, no. 161/2002. The bill also includes provisions requiring that a financial institution’s composition proposal (scheme of arrangements) be approved by a District Court Judge unless the Central Bank of Iceland has determined that it does not pose a threat to monetary, exchange rate, or financial stability. 

A new bill of legislation on a stability tax imposes a one-off 39% tax on the total assets of the failed commercial or savings banks in accordance with their assessed value as of 31 December 2015. The tax is intended as to address the negative effects that would derive from full distribution of capital upon the conclusion of taxable entities’ winding-up proceedings. After the tax has been paid, and upon fulfilling specified conditions, the taxable entities will be granted an exemption from the Foreign Exchange Act, no. 87/1992. Those entities that are currently in winding-up proceedings and conclude them with an approved composition agreement by 31 December 2015 will not be considered taxable entities. 

Furthermore, amendments to the Foreign Exchange Act passed by Parliament yesterday evening are intended to reinforce the premises of the Government’s capital account liberalisation measures and offset the risk created when foreign exchange transactions and capital transfers by certain parties are liberalised in stages.

 

Together, these bills of legislation form a comprehensive solution to the problem that settlement of the failed financial institutions’ estates and distribution of capital to their creditors would create if no action were taken. It is estimated that Treasury revenues from the stability tax could total ISK 682 billion, after adjusting for authorised deductions. The unadjusted tax amounts to ISK 850 billion. The stability conditions solve the problem in roughly the same magnitude as the stability tax, but using a different methodology and approach. 

The capital reverting to the State as a result of the stability conditions or stability tax must not have adverse effects on the money stock; furthermore, it must not have other expansionary effects that could undermine economic stability. This capital will be used to reduce Treasury debt as the opportunity arises, as the Treasury has borne substantial expense from the collapse of the financial system. When the settlement of the failed banks’ estates and the liberalisation of capital controls are complete, major uncertainties concerning the Treasury’s debt service burden will have been eliminated, and it is assumed that interest premia and interest expense will decline markedly. 

Currency auction for holders of offshore ISK

The stock of offshore krónur creates a problem in connection with capital account liberalisation, as it consists of highly liquid foreign-owned ISK assets that would presumably have a strong impact on exchange rate stability if attempts were made to release them all at once. The offshore ISK problem is solved with currency auction and the sale of ISK- and EUR-denominated bonds with a maturity profile consistent with Iceland’s balance of payments. Owners of offshore ISK can choose from among three options: currency auction, long-term Treasury bonds, or locked non-interest-bearing accounts. The auction process ensures that all offshore ISK will be brought under control. The offshore ISK owners that bid on foreign currency in exchange for their krónur will pay a premium for doing so, thereby bearing the necessary cost of releasing them from the confines of the capital controls. 

Further information can be found on www.fjr.is/afnam. 

More news

Treasury Bill Auction Announcement RIKV 20 0205
Series RIKV 20 0205
ISIN IS0000031292
Maturity Date 05.02.2020
Auction Date 27.06.2019
Settlement Date 01.07.2019

On the Auction Date, between 10:30 am and 11:00 am, the Government Debt Management will auction Treasury bills in the Series, with the ISIN number and with the Maturity Date according to the table above. Payments for the Treasury Bills must be received by the Central Bank before 14:00 on the Settlement Date, and the Bills will be delivered in electronic form on the same day.

Further reference is made to the General Terms of Icelandic Treasury bills and General Terms of Auction for Treasury bills on the Government Debt Management website.

For further information please contact Oddgeir Gunnarsson, Government Debt Management, at +354 569 9635.

Jun 13 2019
Bond News
Republic of Iceland issues a new Eurobond at the lowest yields in the Republic´s history

The Republic of Iceland has today concluded agreements on issuance of bonds totalling EUR 500 million, or the equivalent of ISK 71 billion.  

The bonds bear fixed interest of 0.1% and have a 5-year maturity, with a yield of 0.122%. This is the lowest yield in the history of the Republic. Investors showed strong interest in the issue, with total subscriptions around EUR 2,5 billion or five times the size of the issue.  The broad-based investor group is comprised of central banks and other institutional investors, mainly from Europe. Barclays, JP Morgan, Morgan Stanley and Nomura were joint managers for the issue.

Yesterday an offer of buy back of existing bonds of 750 million euros issued in 2014 expired. Owners of 60.5 million euros accepted the offer, in addition to those 398 million already tendered in December 2017. Owners that wished for got a priority allocation in the new bond.

Results of additional issuance of Treasury bonds RIKB 28 1115

As stated in paragraph 5 of Terms of Invitation to Tender for Treasury bonds, the Government Debt Management offered the equivalent of 10% of the nominal value sold in the auction 7 June, at the price of accepted bids. This time Primary Dealers did not exercise their right to purchase in RIKB 28 1115. Total outstanding nominal value of RIKB 28 1115 is now 61,001,601,519 kr. Settlement date is 12 June 2019.