On 15 February an unusual auction was held by Central Bank of Iceland in which the Bank offered to purchase euros against payment in Icelandic Treasury series bonds. The result was that the sellers got 50% more ISK for their euros than the official exchange rate indicates.

The idea is to get more foreign currency into the country, especially from Icelandic pension funds. Officially the auction is called “an element in the removal of restrictions on capital account transactions” and will reduce the annual Treasury’s refinancing need. Bonds sold in the series amounted to 17 thousand million ISK in nominal value.

The Central bank needs to get more foreign currency reserves before it has to repay loans from the International Monetary Fund, loans that had the purpose of stabilizing the Icelandic economy and the currency after the economic collapse in 2008.

The accepted exchange rate in the auction was 240 krona for each Euro. The official exchange rate is 162 ISK to the euro, so the auction was a bargain for those who really wanted Icelandic currency. One of the reasons the currency is so weak is, of course, the low demand. Many speculate that demand is low because of currency restrictions. Hence, the Icelandic economy seems to be in a vicious cycle.

BJ