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IMF: Discussions for third review complete
 An International Monetary Fund (IMF) mission headed by mission chief Mark Flanagan visited Iceland last week to discuss the third review of Iceland's Stand-By Arrangement (SBA) with the Fund. This was the mission's second visit to Iceland for these discussions, the first having taken place in late June. In a press release issued last Friday, the IMF states that discussions with the Icelandic authorities concerning the third review of the SBA are now formally complete. The next steps will involve finalising a few outstanding technical details, upon which the programme will be referred to the IMF Executive Board for consideration. The aim is to present the programme to the Board in early September. According to the press release, the IMF's resident representative, Franek Rozwadowski, said the programme is generating the desired results, and the parties concerned are satisfied with the progress made to date. The press release also states that the recession in Iceland had been shallower than originally expected.
Treasury bond auction well received
  The Treasury can be satisfied with the results of the bond auction held by Government Debt Management (GDM) last Friday, when bonds were sold for nearly ISK 8 bn nominal value to finance the deficit foreseen for the quarters to come. Offered in this auction were the second-longest nominal Treasury bond series, RIKB19, and the indexed series RIKS21.
For the nominal bonds, bids were submitted for just under ISK 7 bn nominal value, with bids accepted for ISK 3.6 bn. In the latter series, bids totalled ISK 5.4 bn nominal value, and bids were accepted for ISK 4.3 bn. The final yields were 5.99% for the RIKB19 bonds and 3.52% for the RIKS21, according to the news release published by GDM on Friday.
Keen interest in index-linked bonds
Interest in the indexed RIKS series has mounted steadily in the past month and has held strong, probably due in large part to the increase in indexed bond yields, which have risen above the 3.5% actuarial yield required for pension funds. As a result, the pension funds have been able to purchase RIKS bonds in the last two auctions without compromising their actuarial position. There was also considerable demand for RIKB19 in last Friday's auction, even though the yield was lower than in the previous auction of the series, which took place in late May. Last Friday's final yield was 5.99%, while the yield in the May auction was 6.61%. The yield on this series is now at its lowest point since the bonds were issued in February 2008.
Nominal Central Bank interest rates instead of uncertainty
 On Friday, the District Court of Reykjavík ruled that the contractual interest rates on exchange rate-linked loan agreements shall not remain unchanged without provisions linking the loans to currency exchange rates. The Court ruled in favour of Lýsing hf., which had filed suit against a borrower with an exchange rate-linked motor vehicle loan, demanding that the interest terms be amended in view of the derogation of exchange rate linkage. The Court decided that the Central Bank of Iceland's non-indexed interest rates should be used as a basis for interest rate determination.
The decision will be appealed to the Supreme Court, which will probably hear the case this fall. The District Court judgment came on the heels of two Supreme Court of Iceland decisions, handed down on 16 June, which deemed exchange rate linkage unlawful. Since those judgments were rendered, both the outstanding balance of the loans falling within their scope and the interest rates pertaining to those loans have been up in the air. As is well known, the Central Bank (CBI) and the Financial Supervisory Authority have issued guidelines specifying that the CBI's nominal interest rates should form the basis for interest calculation. That move has proven controversial, but it is clear that if the Supreme Court upholds Friday's District Court decision, all loans containing unlawful exchange rate linkage provisions will be handled according to the guidelines.
Inflation, expectations, and external trade
 A number of important statistics are due to appear this week. The Capacent Gallup Consumer Sentiment Index for July will be published tomorrow. Consumer sentiment has continued to brighten, according to the June index, which rose by four points month-on-month to its post-crisis high of 61.2, clearly reflecting growing optimism among Icelanders. The past few months' upbeat sentiment has been focused primarily on expectations for the future, according to the Capacent Gallup index. It will be particularly interesting to see whether this optimism is beginning to show in attitudes towards the current situation. The Consumer Sentiment Index provides a quantitative indication of consumers' attitudes towards the economy and the labour market. The employment outlook has been rather more buoyant recently, possibly affecting consumers' current expectations.
Will inflation continue to subside?
 On Wednesday, Statistics Iceland (SI) will publish the consumer price index (CPI) for July. We project a month-on-month decline of 0.2%. If that forecast is borne out, inflation will drop from 5.7% to 5.3%, its lowest measurement since late 2007. In our forecast, sales exert strong downward pressure on the CPI, as is customary in July, and we assume that the index will fall temporarily by as much as 0.5% as a result. Furthermore, indicators imply that house prices are on the decline again after the uptick this spring, contributing 0.1% to the drop in the CPI according to our forecast. Offsetting this, however, are petrol prices, which have risen sharply since SI's June measurement. We project that fuel prices will raise the CPI by 0.2%. In addition, electricity prices rose somewhat at the beginning of July. Other major subcomponents will tend to rise modestly in July, according to our forecast.
Handsome merchandise account surplus year-to-date
 On Friday, SI will publish statistics on external trade in June. According to the preliminary figures that appeared earlier this month, the merchandise account surplus was positive by ISK 8.6 bn in June. Merchandise exports totalled nearly ISK 48 bn during the month, while imports were just over ISK 39.3 bn. If the preliminary numbers prove to be accurate, the merchandise trade surplus for the first half of the year will total ISK 63.5 bn, a much larger surplus than the ISK 39.3 bn recorded during the same period in 2009. We consider it likely that the merchandise account surplus will be over ISK 100 bn this year, as opposed to last year's surplus of ISK 90.3 bn. This year's surplus could range between 7% and 8% of GDP, as compared with last year's figure of 6%.
| Date: |
Subject: |
Most recent release: |
Source: |
| Jul.27.10 |
Consumer Confidence Index for July 2010 |
Jun.30.10 |
Capacent Gallup |
| Jul.28.10 |
Consumer price index in July 2010 |
Jun.29.10 |
Statistics Iceland |
| Jul.29.10 |
Producer price index in June 2010 |
|
Statistics Iceland |
| Jul.30.10 |
New registrations and insolvencies of companies in June 2010 |
Jun.30.10 |
Statistics Iceland |
| Jul.30.10 |
External trade of goods, January-June 2010 |
Jul.7.10 |
Statistics Iceland |
| Jul.30.10 |
Value of catch January-April 2010 |
|
Statistics Iceland |
|
|
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OMX ICEX, 7/23/2010
|
| Category |
Volume |
| Bonds |
36 |
| Equities |
3,789 |
| Total |
3,825 |
|
REIBOR Market, 7/23/2010
|
| Term |
REIBID |
REIBOR |
| O/N |
6.50% |
7.00% |
| SW |
6.50% |
7.00% |
| 1M |
7.10% |
7.50% |
| 3M |
6.80% |
7.05% |
| 6M |
6.35% |
6.70% |
| 12M |
6.10% |
6.35% |
|
Exchange Rates, 7/23/2010
|
| |
pr.ISK |
3m.Libor |
3m.fwd. |
| USD |
121.37 |
0.49% |
1.9 |
| GBP |
188.12 |
0.74% |
2.9 |
| JPY |
1.39 |
0.24% |
0.0 |
| EUR |
157.10 |
0.82% |
2.4 |
| Vt. ISK |
212.88 |
0.85% |
3.2 |
|
Currency Crosses, 7/26/2010
|
| |
EUR |
GBP |
USD |
| GBP |
0.835 |
|
|
| USD |
1.294 |
1.550 |
|
| CHF |
1.357 |
1.625 |
1.048 |
| JPY |
112.851 |
135.134 |
87.185 |
| NOK |
8.002 |
9.582 |
6.182 |
| SEK |
9.469 |
11.339 |
7.315 |
|
Icelandic Equities, 7/23/2010 |
| ID |
Vol. |
Yield |
Day.ch. |
| OSSR |
27 |
190.00 |
2.15% |
| MARL |
9 |
93.40 |
0.97% |
| FO-EIK |
0 |
82.00 |
0.61% |
| ICEAIR |
0 |
3.50 |
0.00% |
| FO-AIR |
0 |
117.00 |
0.00% |
|
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