Low risk of default in the coming year
A glance at the Treasury's foreign commitments during the coming 12M suggests such pessimism is hard to justify. According Market Information from Government Debt Management (GDM), at year-end 2009, the Treasury's total foreign debt was equivalent to ISK 357 billion (bn). As none of this debt matures in 2010, the Treasury only needs to pay interest on its debts, which can be roughly estimated to amount to just under ISK 20bn. Two large Treasury maturities fall due in 2011, however, one of them a EUR 300m syndicated loan, to be paid in September, and the other a EUR 1bn bond maturing in December. Naturally, interest will also have to be paid on these and other obligations as well. If no further loans are obtained to boost the Central Bank's foreign reserves, they could become quite depleted following these payments. However, it is hardly before April 2012, when a EUR 250m bond matures, that the currency reserves could be exhausted, even if no further foreign currency were acquired prior to that time.

Impact of Landsvirkjun's debt
Apart from the Treasury itself, Landsvirkjun is the only borrower with state guarantee that has sizeable foreign debts, as far as we have been able to determine. The company owed close to USD 2.6bn (ISK 330bm) in foreign currency as of mid-2009, primarily in EUR and USD. Instalments on this debt, however, are distributed fairly evenly over the coming years, according to the company's interim financial statements. Repayments in 2011 are equivalent to USD 282m and to USD 201m in 2012, plus interest. According to a special a contingent credit facility negotiated last summer, Landsvirkjun has access to up to USD 300m from the Central Bank. The company's cash flow, however, has in all probability improved considerably since the first half of 2009 as a result of rising world market prices for aluminium. Furthermore, Landsvirkjun appears to be very liquid according to a recent news statement on the company's website, which maintains that its cash, revolving credit facilities and cash flow taken together would suffice to cover all its debts until 2012.

Yield on Treasury EUR bonds rise
The price formulation on markets abroad for EUR bonds issued by the Treasury maturing in December 2011 appears to be the most indicative of developments in what is admittedly a very shallow market. Comparing the yield on these bonds with CDS spreads on Treasury debt reveals that their movements have been fairly closely correlated in recent quarters. The EUR bond buy yield has, for instance, risen markedly YtD, to almost 11% according to Reuters. This is equivalent to a premium of approx. 9.5% on German state bonds of similar duration. It should be borne in mind, however, that there is a considerable gap between buy and sell yields on Treasury debt. The difference between the median yield, which is currently around 9.45% and that of German state bonds, is just over 8%, which agrees roughly with the CDS spreads for debt of comparable duration.

Managers anticipate higher inflation

Now only 30% of respondents say they will support the legislation, while one month ago 53% indicated they would do so, and in the survey of 9-11 January the proportion had dropped to 33%. The percentage who intend to cast a blank ballot has dropped from 6% at the beginning of January to 4% in the latest survey. 

Support for the decision by the President of Iceland not to sign the Icesave agreement into law has increased steadily in January. In the survey of 5-6 January, just under 41% of respondents agreed with the President's decision while at the end of January 61% were in agreement.