Lánamál ríkisins - Company Announcement

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.