03 May 2011

Economic Affairs no. 4: What does Iceland owe?

The Central Bank has published an English translation of an article called “What Does Iceland Owe?”, in its publication series Economic Affairs. The authors are Arnór Sighvatsson, Ásgeir Daníelsson, Daníel Svavarsson, Freyr Hermannsson, Gunnar Gunnarsson, Hrönn Helgadóttir, Regína Bjarnadóttir, and Ríkardur Bergstad Ríkardsson.

The article peers through the maelstrom caused by the collapse of the financial system, causing the settlement of assets and liabilities according to official standards to give a misleading view of the debt position that will be the strongest determinant of Iceland’s welfare in coming years. In the report, the authors estimate the asset and liabilities values that are likely to emerge when the dust settles. This can be called Iceland’s “latent” debt position, although the term “underlying debt position” has also been used. Although there is still considerable uncertainty about the findings, it is virtually a certainty that, when the estates of the failed financial institutions have been settled and other factors that skew the overall picture have been accounted for, it will be revealed that Iceland’s net debt has not been lower in decades. Net public sector debt, on the other hand, will be considerably higher. The report also estimates the country’s latent current account balance, which (for the same reasons) is much more positive than official figures indicate, in part because accrued interest on the estates of the failed banks will never be paid.

The article can be accessed here: Economic Affairs 4 (pdf)