Last tranche of Nordic loans disbursed to Iceland

Bilateral loans between the Nordic countries and Iceland were negotiated in connection with the Icelandic authorities’ IMF-supported economic programme, which was concluded in 2011. On 30 December 2011, the last tranche of these loans was paid to Iceland. The loans in question total 887.5 million euros (approximately 141 b.kr. at the current exchange rate), which will be added to the Central Bank of Iceland’s foreign exchange reserves. Of that amount, the Treasury is borrowing 647.5 million euros (roughly 103 b.kr.) from Denmark, Finland, and Sweden, and the Central Bank of Iceland is borrowing 240 million euros (about 38 b.kr.) from Norges Bank.

Since October 2008, Iceland has borrowed a total of 753 b.kr. in order to expand the Central Bank’s foreign exchange reserves. The reserves now total 1,030 b.kr., or 2/3 of Iceland’s GDP. Excluding both foreign-denominated deposits held in the Central Bank of Iceland by parties other than the Treasury and the next twelve months’ payments on Treasury and Central Bank loans, the foreign exchange reserves equal about 40% of GDP. By this measure, the foreign exchange reserves are now the largest in Iceland’s history. This does not change the fact, however, that the reserves are fully leveraged, in view of all of the loans taken in recent years to expand them.

Interest payments on foreign-denominated loans taken by the Treasury and the Central Bank are estimated at 33 b.kr. in 2012. Offsetting these interest payments are the interest income deriving from the investment of the reserves. Net interest expense on the reserves is estimated at 3-4%, or the equivalent of 1½-2% of GDP.

Given the uncertainty in global financial markets and that surrounding prospective capital account liberalisation in Iceland, it is important for the country to maintain sizeable foreign exchange reserves in spite of the associated expense. It is hoped that, as conditions change, it will be possible to scale down and deleverage the reserves.

Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.

No. 1/2012
3 January 2012