31 May 2010

Pension funds purchase Treasury's HFF bonds to strengthen FX reserves

The Central Bank of Iceland, on behalf of the Treasury, has reached an agreement with 26 pension funds, according to which the funds will purchase Housing Financing Fund (HFF) bonds owned by the Treasury. The Treasury and the Central Bank acquired the bonds following the banks’ collapse and with agreements with Banque centrale du Luxembourg and the liquidator of Landsbanki Luxembourg on 18 May 2010. The total nominal value of the bonds is 90.2 b.kr., and the sale is made with the aim of expanding the foreign exchange reserves. Furthermore, it reduces the Treasury’s net foreign-denominated debt, which had increased because of the financing of the aforementioned purchase. According to the agreement, the pension funds will sell foreign assets and pay for the bonds in euros, remitting a total of EUR 549 million. This transaction increases the Central Bank of Iceland’s foreign exchange reserves by 82 b.kr. (512 million euros), or by 17%.

The sale took place in a closed auction that was concluded yesterday, 30 May. All public pension funds in Iceland were invited to participate. It was not possible to arrange an open auction due to complex conditions and reservations attached to the sale. Furthermore, it was necessary to expedite the agreements to eliminate uncertainty and mitigate the potential effect on the market.

The pension funds were selected to participate in this closed auction because they are already the largest owners of HFF bonds, which fit well with their investment strategy. They also own considerable foreign assets and, with their participation in this transaction, contribute to the creation of better conditions for the removal of the capital controls. The fact that the pension funds are a homogeneous group has made it possible to conclude the transaction quickly, which significantly reduces uncertainty and mitigates the effect of this large transaction on the domestic bond market. Because the pension funds are long-term investors, this will make it easier for the Central Bank when it begins the next phase of capital account liberalisation.

The Central Bank of Iceland is of the opinion that this transaction is an important milestone in the authorities’ plans to lift the capital controls. As has been stated previously, non-residents’ holdings in Icelandic krónur are reduced by up to one-fourth with the purchase of Avens B.V., and the present transaction considerably bolsters liquidity in the domestic economy, which is a very important element in the Government’s economic programme.

The bonds will be sold at a fixed yield of 7.2%. The nominal value of the bonds sold is as follows:

Housing Financing Fund bonds            Nominal value units
HFF150914                                        7,215,500,000
HFF150224                                        14,431,000,000
HFF150434                                        34,273,625,000
HFF150644                                        34,273,625,000

The pension funds will pay for the assets in foreign currency at the official buying rate listed by the Central Bank of Iceland. This investment is not considered new investment in the sense of the Foreign Exchange Act.

The transaction will not change previously announced plans concerning the issue of marketable Treasury bonds.

The transactions that have now been agreed upon, together with the agreements made concerning Avens B.V. assets in Luxembourg on 18 May 2010, affect the debt of the national economy and the Treasury, as well as significantly improving foreign liquidity in the domestic economy. First, both total debt and net debt are reduced by over 3½% of GDP. The Treasury’s total debt in foreign currency increases by just over 3½% of GDP, but the foreign exchange balance of the Treasury and the Central Bank improves by the equivalent of 5½% of GDP. With this transaction, it can be said that the Treasury has obtained financing equivalent to 0.75% fixed interest for 15 years.

Governor Már Guðmundsson said the following about the transaction: “This agreement paves the way for the removal of the capital controls while highlighting the enormous advantage that lies in Iceland’s having such strong pension funds. With their participation, our pension funds have put their shoulder to the wheel of the economic recovery that is now on the horizon in Iceland.”

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


No. 13/2010
31 May 2010