Sigrún Davíðsdóttir's Icelog

This morning, Mar Gudmundsson governor of the Central Bank of Iceland met with three Althingi committees to answer questions on the economic outlook. Here are some points from the meeting:*

–        Due to the Icelandic state’s obligations there will be an outflow of currency in the foreseeable future. Consequently, the state will have to look abroad for funding, the sooner the better. Most likely, there will be a bond issue abroad later this year. The relatively low CDS improves the outlook of refinancing

–        The influence of Icesave on a bond issue is undeniable. If the latest Icesave agreement will be rejected in the coming referendum on April 9^th there might be less luck in seeking refinancing

–        A ‘no’ in the Icesave referendum will delay any easing of the currency restrictions

–        The first step in easing the currency restrictions will most likely be to open doors in Iceland to the off shore kronas

–        The currency restrictions can’t be lifted until it’s clear that Iceland can refinance itself abroad. As long as the currency restrictions are in place, the CBI has to buy currency abroad, instead of borrowing, resulting in a lower exchange rate and higher prices on imported goods.

The CBI recently published a report on Icelandic debt, ‘What does Iceland owe?’ So far, there is only an Icelandic version and an English summary but an English version is due. The main results are:

“The article peers through the maelstrom caused by the collapse of the financial system, causing the outcome 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 likely outcome of asset and liabilities values that will emerge when the dust settles. This can be called Iceland’s “latent” debt position, but the term “underlying” debt position has also been used. Although there is still considerable uncertainty about the findings, it seems certain 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 international investment position 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 hidden 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.”

According to the CBI the outlook is good, Iceland isn’t as heavily indebted as some other countries etc.: 70% of GDP. If the debt related to Actavis are taken out, the debt is 50-55%. In a comment from an economist he added: ‘What’s the difference between the Irish and the Icelanders? Icelanders are good at pretending to be broke.’

However, this isn’t beyond dispute. Some economists I’ve talked doubt the CBI’s conclusion, pointing out that there has often been a tendency to overestimates in Icelandic figures. Qui vivra verra.

*I didn’t follow the broadcast of the meeting but have based this on news in the Icelandic media.

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