It costs three kronur to produce a new one krona coin, which leads Mar Gudmundsson to ponder if they are still necessary. He also says it is possible a new 10,000 kronur note will come into circulation, replacing the 5,000 as the biggest denomination.

There are over 96 million one krona coins in circulation today and it falls to the Central Bank of Iceland to mint coins to keep up with demand.

The present-day one krona coin was put into circulation in 1981, but the currency has been the victim of inflation since then. Today it takes 37 kronur to buy what one krona bought back then. It is perhaps not surprising that it now costs a lot more to mint the coins than they are actually worth.

At present the 5,000 kr. note is the biggest unit of currency in Iceland. At only EUR 30, many people consider that impractical — especially in a relatively expensive Nordic country. A 10,000 kr. note would be welcomed by many in business. The use of cash in Iceland is generally very low, as debit and credit cards are accepted almost everywhere and even for very small transactions.

An artist has already created 10,000 kr banknotes for an exhibition in 2008; but they were clearly not legal tender, as one shop assistant found out.

This information came from Lara V. Juliusdottir, chair of the bank’s board of directors, at the Central Bank of Iceland AGM yesterday. The bank wrote off ISK 21.3 billion last year in assets from its portfolio, RUV reports.

Juliusdottir said that the bank’s poor figures were due to the write off of assets which lost their value in the banking crisis — and that successful actions to strengthen the Icelandic krona and reduce inflation in the country are expensive. But, she added, by holding large foreign currency reserves, the bank is well shielded from exchange rate changes.

Lara Juliusdottir’s full speech can be read in English here. Further details and transcripts from the AGM are available on the English Central Bank of Iceland website.

At a time when the Althingi parliament is examining a new bill that would see Iceland refund lost Icesave money to the British and Dutch governments, the timing of this latest spat is very sensitive, according to The Guardian.

As previously reported on IceNews, a new Icesave agreement was agreed upon in December and must now be voted on by the Icelandic parliament. If Althingi passes the bill, there is still the potential for President Olafur Ragnar Grimsson to send it to a public referendum. Grimsson is the only Icelandic president to have ever used his/her power to send new laws to a public vote — something he has now done twice; including for the last Icesave agreement. The public voted no by over 93 percent last March.

As reported by Vidskiptabladid, David Oddsson has come out claiming that shortly before the banking crisis of autumn 2008, Mervyn King gave him personal assurances that the Icelandic government and taxpayers would not be called upon by Britain to honour depositor guarantees.

Furthermore, he claims to have the whole conversation on tape: “Usually we did not record conversations such as this one, but for some reason it was done in this case,” Oddsson told Vidskiptabladid.

Icesave held UK funds of nearly GBP 5 billion at the time of its collapse and both central bank bosses had been involved in trying to broker a solution that would have avoided the widespread destabilising effect of an outright collapse. “I was very heartened to hear this and thanked him,” Oddsson said of King’s alleged assurances.

Meanwhile in London, King is said to be livid at Oddsson’s claim and a Bank of England spokesman told The Guardian: “The accusation is completely untrue. The governor told David Oddsson he had to act in the interests of Iceland. The governor had been urging the central bank of Iceland for many months to reduce the size of its banking system. He wrote to Mr Oddson on 23 April 2008 making this point clearly.”

David Oddsson says he wants the Central Bank of Iceland (which he no longer works for) to make the recording public, but that it cannot do so without Bank of England approval.

Special Prosecutor, Olafur Thor Hauksson told Visir.is that house searches are taking place in at least three places today as part of investigations into the central bank, MP Bank and Straumur Bank.

Stefan Johann Stefansson at the central bank confirmed that agents were in the building conducting searches; and it has also been confirmed that searches are underway at MP Bank and ALMC (formerly Straumur).

An ALMC spokesman said that the premises are indeed being searched and that the bank’s staff members are doing their best to help.

In other news, four people have so far been arrested today in connection with the special prosecutor’s investigation into Landsbanki.

One of the arrested parties is Jon Thorsteinn Oddleifsson, former Landsbanki treasury boss; and it is not yet known who the other three are.

According to Visir.is sources, the arrests concern a brand new section of the wider case against the bank and are not directly connected to searches and arrests made last week.

Gudmundsson surmises that the Euroland debt crisis is not the fault of the single currency, but rather of lax banking regulation — just as it was in Iceland. “There is no panacea in terms of the exchange rate regime. You can always get yourself into problems if you try hard enough,” he said.

On the other hand, he said that joining the euro would certainly provide Icelandic businesses and households with a stronger and more stable currency. The volatility and collapse of the Icelandic krona has been very hard for companies and householders to bear and very hard for the central bank to manage, he said.

Gudmundsson predicted that the euro will survive the Greek and Irish debt crises. Iceland has a strong case for joining the EU and talks are already underway. This, despite the fact that a majority of Icelanders say they would vote against joining if the referendum were held today. Pro-Europeans argue that all they need is more time to introduce people to the positives of joining the bloc.

September 16, 2010, Ministry of Economic Affairs

Protesters gathered with pots, pans and vuvuzelas to make as much noise as possible; but central bank employees insisted the peaceful protest was having no effect on their workday.

A motorbike was driven gently four or five times into the locked door of the Central Bank, with no appreciable damage done, and police in riot gear were deployed. Three lorries were also used to block the busy road past the Bank.

However, after most protesters felt they had got their point across to the Bank and the media and left, a hardcore group remained.

The protest turned slightly violent around 13.30 when one man was arrested and singer Ellen Kristjansdottir was sent to hospital with an injured arm. The singer, sister of famous singer KK, blamed unnecessary police force for her injury. Asked why she attended the protest, she said she has had enough of the authorities’ inactivity on important issues.

(Central Bank of Iceland press release)

Guidelines issued by the Financial Supervisory Authority and the Central Bank of Iceland to financial undertakings due to non-binding clauses linking loans to the exchange rate

On 16 June 2010, the Supreme Court of Iceland handed down two decisions pertaining to the legality of linking loan obligations in Icelandic krónur to the exchange rate of foreign currencies; cf. Cases no. 92/2010 and 153/2010 begin_of_the_skype_highlighting 153/2010 end_of_the_skype_highlighting. The Court concluded that such exchange rate linking was non-binding.

Until a final conclusion has been reached concerning the scope and terms of the loan agreements affected by these Supreme Court judgments, it is especially important to gather reliable information, create stability in financial market transactions, and promote a secure and effective financial system.

The Financial Supervisory Authority and the Central Bank of Iceland therefore direct the following guidelines to financial undertakings:

1. Loan agreements that, in the opinion of the financial institution concerned, contain non-binding exchange rate linkage clauses (cf. the above-cited Supreme Court judgments) shall be recalculated. Instead of linking the loan agreements to foreign exchange rates and interest rates, the institutions shall calculate the loans based on interest rates determined by the Central Bank of Iceland, with reference to the lowest interest rate on new, general, non-indexed or indexed loans from credit institutions, which rates shall be used in cases of uncertainty about loan terms – cf. Articles 4 and 18 of the Act on Interest and Price Indexation, no. 38/2001 – unless the parties agree otherwise.

2. Loans shall be treated based on the aforementioned premises as soon as is practicable. If, for technical reasons, a financial institution cannot comply with these guidelines immediately, it shall ensure that payment amounts are aligned with the above guidelines as closely as possible, and that they are fully in compliance with the guidelines no later than 1 September 2010.

3. Financial institutions shall re-assess their economic capital in view of these conditions and shall ensure that it is sufficient to cover potential asset erosion over and above that which derives from Item 1 above.

4. Reporting to the Financial Supervisory Authority and the Central Bank of Iceland on foreign exchange balance, liquidity, and capital adequacy shall be based on the above-specified premises.

(Central Bank of Iceland press statement)

Central Bank spokespeople would not be drawn on the reasons for the decision or its timing, but RUV reports that the bank’s monthly interest rate decision meeting is today.

The state treasury also decided yesterday to buy back government bonds to the tune of EUR 200 million.