Central Bank of Iceland takes control of krona denominated bonds

Seðlabankinn1The Central Bank of Iceland, on behalf of itself and the National Treasury of Iceland, has concluded an agreement with the Banque centrale du Luxembourg (BCL) and the liquidator of Landsbanki Luxembourg S.A., concerning the purchase of 98% of outstanding Avens B.V. bonds.

(Central Bank of Iceland press release)

The bonds were owned by Landsbanki Luxembourg S.A. and pledged to BCL as collateral for a liquidity facility provided in 2008. Landsbanki Luxembourg S.A. is a subsidiary of Landsbanki Íslands hf.

According to the agreement, the Central Bank of Iceland will gain full control over the assets of Avens B.V., which is the largest single owner of króna-denominated assets outside Iceland, with ISK holdings amounting to around 120 b.kr., or one-fourth of all króna-denominated assets owned by non-residents. About one-third of this amount is in bank deposits, while the remaining two-thirds are in bonds issued by the Treasury or with a Treasury guarantee.

The Central Bank of Iceland will remit a large portion of the purchase price with a 15-year Treasury bond in the amount of 402 million euros. The bond in question is an amortisation bond bearing variable interest based on EURIBOR rates plus a premium aligned with the terms offered by the Nordic countries to Iceland.

No decision has been taken on the disposal of Avens B.V.’s assets. The assets will be administered by ESÍ ehf. (the Asset Holding Company of the Central Bank of Iceland), as is the case with other assets and claims that have reverted to the Treasury and the Central Bank in the wake of the banking collapse.

Már Guðmundsson, Governor of the Central Bank of Iceland, and Yves Mersch, Governor of the BCL, signed the agreement in Luxembourg yesterday. On this occasion, Governor Már Guðmundsson said, “This agreement is an important milestone in the settlement following the collapse of the Icelandic banks. It will reduce the Icelandic economy’s external debt by more than 3,5% og GDP and will reduce non-resident ISK holdings by nearly one-fourth, or about 8% of GDP. This agreement is an important premise for capital account liberalisation in Iceland. I would like to thank Governor Yves Mersch and his colleagues, and the liquidator of Landsbanki Luxembourg, Mrs. Yvette Hamilius, for their considerable efforts in leading this issue to a successful conclusion. The friendship and constructive spirit expressed by Governor Mersch throughout this process helps to overcome some of the problems created by the collapse of Icelandic banks during the financial crisis and lays a sound foundation for the continued good co-operation between Banque centrale du Luxembourg and the Central Bank of Iceland.”

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