Tuesday, 19 June 2012

Iceland's prepayment of bailout money

A very quick note on Iceland's prepayment of IMF and Nordic bailout money since I got a few retweets on the matter.

Basically, the treasury is extending its liquidity profile. The cost is higher rate of interest, expectedly so. In May, Iceland issued a 1.0bn. USD bond bearing a rate of interest of 6%, fixed. It matures in 2022. This money is now spent on the prepayment of IMF and Nordic bailout loans, maturing in the next few years. As far as I can figure out, those loans carry a rate of interest of 3.25%.

So, yes it looks good on paper that we're prematurely paying back the money we got in 2008. But we're doing so with even dearer money, almost double as expensive in fact. People may have different thoughts about how much liquidity is needed but no one can deny that interest rates of 6% for a sovereign are, well, high. Mortgage rates in US are considerably lower in comparison and the fact of the matter is that the demand during the bond issuance was quadruple the supply! Well of course, it's a sovereign offering interest rates of 6%! Adam Smith's "prodigals and projectors" come to mind.

More importantly, can we seriously expect the income of the State, measured in USD, to grow on average by 6% per annum? I cannot see how that's going to happen, especially when everybody expects the krona to collapse the moment the capital controls are lifted!

Is anybody whispering "Ponzi" back there? Maybe we should have offered a bit lower rate of interest...

The maturity profile of the Icelandic Treasury, foreign currency denominated debt only (not external debt). The 2022 column is the 6% USD bond, issued last month. From the Central Bank of Iceland.

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