29.06.2016

The Central Bank foreign currency auction of 16 June

 The Central Bank foreign currency auction of 16 June

Prior to the auction that took place on 16 June 2016, the Central Bank of Iceland solicited offers for the sale of offshore króna assets versus cash payment in foreign currency. On 21 June, the Bank announced the main results of the auction and offered to purchase, at an exchange rate of 190 kr. per euro, the offshore króna assets not sold in the auction. The Terms of Tender for these transactions were announced on 22 June 2016.

The final results of the 16 June auction are now available, including the transactions taking place on the basis of the Bank’s tender offer of 21 June. A total of 1,715 offers were submitted and 1,688, or 98.4% of the total, were accepted. Accepted offers amounted to 83 b.kr., of a total of 188 b.kr. submitted in the auction and the post-auction tender. The Central Bank of Iceland’s foreign exchange reserves will be reduced by just over 54 b.kr. as a result.

The offshore krónur offered for sale in the auction fall into the asset classes shown in the following table:

Asset class

m.kr.

Cash

46,260

Central Bank certificates of deposit

5,448

Treasury bonds

15,484

Treasury bills

7,163

Housing Financing Fund bonds

559

Other securities*

7,971

Total

82,885

*Do not directly affect the foreign exchange reserves 

The auction was part of the comprehensive action plan to lift the capital controls; cf. the Government and Central Bank’s capital account liberalisation strategy of 8 June 2015. The 16 June 2016 auction was the last in a series of twenty-three auctions in which owners of offshore krónur were invited to purchase foreign currency before the authorities begin lifting capital controls on resident entities; i.e., pension funds, other legal entities, and individuals. The aim is to present a strategy for liberalisation of capital controls on residents in late summer and to present bills of legislation relating to the next steps in liberalisation before Parliament at the legislative session beginning in August. Thereafter, the authorities will examine when and how to lift controls on the offshore króna owners that chose not to participate in the auction. It is clear that participation in the 16 June auction will simplify this process considerably. The remaining owners are fewer in number and form a more homogeneous group, and the outstanding amount of offshore krónur has been reduced markedly.

Governor Már Guðmundsson wishes to state the following in this connection: “The auction and the recent legislative amendments have removed the last major obstacle to our being able to take large steps towards lifting capital controls on residents without running the risk of instability. The offshore overhang has been reduced by more than one-third of GDP in 2009 to approximately 11% of GDP following the auction. Although it was not possible to accept offers for offshore krónur in the amount of 105 b.kr., the number of investors involved has been considerably reduced, thereby facilitating the solution to the remaining problem. Matters have been structured in such a way that the remaining offshore krónur will not cause instability while controls on residents are being lifted. Contagion should be almost non-existent and the risk of instability limited.”

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

 

Press release no. 19/2016
29 June 2016



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