Iceland $2.4 Billion FX Auction on Track, Central Bank Says

  • Gudmundsson says turmoil has had limited impact on finances
  • New prime minister faces vote of no confidence later Friday

Iceland’s central bank said the plan for freeing the last hedge funds caught in the nation’s capital controls is still on track even as political turmoil grips the north Atlantic island.

"We have a counterparty in the current government and the plans are proceeding," central bank Governor Mar Gudmundsson said in an interview in Reykjavik. "I’m hoping that we’ll be able to have the auction – I think it’s very likely – before the summer recess.”

The government is facing a no confidence vote on Friday in the Reykjavik parliament after a week marked by turmoil, protests and the resignation of Prime Minister Sigmundur David Gunnlaugsson following revelations he and his wife had investments in offshore accounts. While the ruling coalition has a majority in parliament, polls show it would stand to lose an election if one were held now.

The country’s finance minister, Bjarni Benediktsson, has promised to stick to a plan to remove capital controls by the end of 2016. The government and the central bank are in the midst of planning an auction in the first half of this year to free about 291 billion kronur ($2.4 billion) held by investors, including hedge funds, in so-called Glacier bonds that were sold in the run up to the country’s financial crisis of 2008.

Gudmundsson said the political fallout from the Panama leaks affair has only had a limited impact on Icelandic foreign currency bonds and the krona and that elections now expected to take place as early as September would not pose a major obstacle to the country’s return to financial normalcy.

"We give our advice and have our independence in terms of setting monetary policy, irrespective of what government is in place," he said. The recent turmoil was not severe enough to need any intervention from the central bank, he said.

Bond yields retreated yesterday as a new premier, Sigurdur Ingi Johannsson, was named. The yield on Iceland’s 2025 note slid to 5.89 percent on Thursday, down from a high of about 6.10 percent.

Despite widespread anger at the revelations, the ruling coalition of Johannsson’s Progressive Party and the Independence Party, run by the finance minister, holds a comfortable majority, controlling about two-thirds of Iceland’s 63-seat parliament.

However, latest polls place the Pirate Party in the lead with 43 percent of the vote, well ahead of the ruling coalition and other opposition parties.

Iceland has a history of voters’ discontent at mainstream politicians, fueled in no small part by the economy’s collapse following the 2008 failure of its three largest lenders. Some of this week’s protests have attracted more than 20,000 people, according to organizers, a huge amount in a country of just 330,000.

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