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Icelandic pension funds aid liquidity through bond purchase

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  • Icelandic pension funds aid liquidity through bond purchase

ICELAND - Twenty-six Icelandic pension funds have agreed to purchase Housing Finance Fund (HFF) bonds owned by the Treasury in an attempt to help boost liquidity in the economy.

The Central Bank of Iceland acquired the bonds, which have a nominal value of ISK90.2bn (€578m), following the collapse of Landsbanki Íslands. These bonds were placed in a subsidiary of Landsbanki - Avens BV, which was the largest non-residents' holder of bonds in Icelandic Króna - and were used as collateral for loans from the Banque Centrale du Luxembourg.

After receiving complete control of Avens' assets, the Central Bank offered Icelandic pension funds - already the largest owners of HFF bonds - the chance to buy the bonds in a closed auction.

The Icelandic Pension Fund Association (IPFA) said it had discussed the offer with directors and boards of the pension funds, the result of which being that 26 schemes agreed to buy the bonds from the Central Bank for a price of ISK88bn.

The sale was also aimed to increase the Central Bank's foreign exchange reserves, so the purchase price for the bonds was set in euros with the pension schemes agreeing to sell foreign assets to pay the price of €549m. This will increase the Treasury's foreign exchange reserves by 17%.

The Central Bank added that because the pension funds are a homogeneous group it was "possible to conclude the transaction quickly", significantly reducing uncertainty and mitigating "the effect of this large transaction on the domestic bond market". It added: "Because the pension funds are long-term investors, this will make it easier for the Central Bank when it begins the next phase of capital account liberalisation".

The Central Bank claimed the transaction would "considerably bolster liquidity in the domestic economy, which is a very important element in the government's economic programme". The bonds sold to the pension fund are index-linked with a fixed yield of 7.2% and an average duration of nine years.

The IPFA stated: "The pension funds got a good deal on the bonds, better than is readily available on the market in Iceland at the moment. By liquidating their foreign assets and transporting their finances to Iceland the pension funds are indeed temporarily increasing their risks. However this investment will contribute to the creation of better conditions for the removal of the capital controls."

The association also highlighted the bonds' fixed yield as being "significantly higher than is expected in the pension funds' actuarial statements". It said: "One can therefore expect that the transaction will improve the actuarial position of the Icelandic Pension System by 1-2%."

Már Guðmundsson, governor of the Central Bank, added: "This agreement paves the way for the removal of the capital controls while highlighting the enormous advantage that lies in Iceland's having such strong pension funds. With their participation, our pension funds have put their shoulder to the wheel of the economic recovery that is now on the horizon in Iceland."

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