Iceland re-enters the bond markets

RATM · 11-06-2011 02:37PM #1

A good news story for Iceland who are now on the way to recovery - modest growth of 2.9% is forecast.

http://www.irishtimes.com/newspaper/finance/2011/0611/1224298736664.html

ICELAND RETURNED to international debt markets for the first time since its banking meltdown more than two years ago as investors offered to buy twice the amount the government offered in dollar-denominated bonds.

“This transaction is an important milestone for Iceland,” finance minister Steingrimur J Sigfusson said in a statement on the government’s website yesterday. “Iceland has set a benchmark in the market which should over time facilitate capital market access for other Icelandic issuers.”

Iceland, which averted a sovereign default by refusing to bail out bondholders when its banks failed in October 2008, will enjoy economic growth of 2.2 per cent this year and 2.9 per cent in 2012 as its budget deficit narrows to 1.4 per cent of gross domestic product, according to the Organisation for Economic Co-operation and Development.

The island’s approach to resurrecting itself from financial ruin has won the praise of Nobel laureate Paul Krugman, who says Iceland is now better off than euro member Ireland.

“Iceland doesn’t have a lot of private debt anymore and has done a lot on the fiscal side,” said Lars Christensen, chief analyst at Danske Bank in Copenhagen, in a phone interview yesterday. “The Icelandic fundamentals on the debt side now are actually quite strong. That’s a fact.”

The $1 billion bond sale was twice oversubscribed, according to the ministry. The debt is due in 2016 and carries a fixed rate 4.993 per cent semi-annual yield. The sale followed a six-day roadshow in Europe and the US.

Barclays Capital, Citigroup and UBS managed the sale.

“The issue comes at a time where global market sentiment is not particularly good due to the European debt crisis,” said Mr Christensen, who in early 2006 predicted Iceland would suffer a recession.

“If you look at the pricing of Iceland’s bonds and compare it to other European countries with similar debt levels as Iceland, to me the yield on the bonds looks pretty attractive.”

Iceland has about €454 million in eurobonds due this year and next, the central bank said last month. That compares with foreign reserves of 759 billion krona (€4.61 billion) in April.

Credit default swaps on Iceland’s debt eased more than 20 per cent since the end of April through June 7th, as investors bet the island faces a lower risk of default than euro members Spain, Portugal, Greece and Ireland. – (Bloomberg)

Such a story reveals the lie that burning the bondholders will leave the ATM's run dry. Iceland did it and are now enjoying growth.

Sand · 11-06-2011 02:44PM

Yeah, the old joke about Ireland and Iceland used to be 1 letter and about 6 months.

But it will be a lot, lot longer than 6 months before we are able to raise money in the bond markets at tolerable rates.

We were assured Iceland was taking the disastrous course of action (one of Brian Lenihans presentations defending his policies actually included a slide which simply read "Iceland! Iceland!") and that they would never ever be forgiven. That markets had long memories, and sulked like jealous teenagers plotting petty revenge for decades.

And yet Iceland has pretty much done everything that our leaders assured us would alienate the markets, and they are able to return and borrow at tolerable rates.

Puzzling.

oppenheimer1 · 11-06-2011 02:54PM

RATM wrote: »

A good news story for Iceland who are now on the way to recovery - modest growth of 2.9% is forecast.

http://www.irishtimes.com/newspaper/finance/2011/0611/1224298736664.html

Such a story reveals the lie that burning the bondholders will leave the ATM's run dry. Iceland did it and are now enjoying growth.

In case you've forgotten, Iceland will at some stage have to pay back the UK and Netherlands....

MrMatisse · 11-06-2011 04:02PM

May have to payback not will.Small money in the grand scheme of things anyway. Cant see them doing it now.

They were brave, looked at historical experience and now wont be enslaving a generation.

steelcityblues · 11-06-2011 04:26PM

A nation that really did 'turn the corner'.

KindOfIrish · 11-06-2011 04:31PM

oppenheimer1 wrote: »

In case you've forgotten, Iceland will at some stage have to pay back the UK and Netherlands....

sure...10% of debt in 50 years time:D

loldog · 11-06-2011 04:36PM

Borrowing money is nothing to celebrate about.

.

Sand · 11-06-2011 04:51PM

@loldog

Borrowing money is nothing to celebrate about.

The ability to borrow money a sign of investor confidence in Iceland.

Ireland cannot borrow (at tolerable levels anyway) as investors do not have any confidence in Ireland.

Its also evidence that investors are slightly more sophisticated than the sulky teenagers they have been portrayed as. If they risk/return matches up, theyll lend. If it doesnt, they wont. They are otherwise wholly inhuman.

later12 · 11-06-2011 07:00PM

Yes, devaluation and capital controls really worked out well for the sovereign in this respect.

Of course, Icelandic banks still have an awfully long and difficult road ahead of them, and restructuring is still not really a feature. While this is good for Iceland, or particularly for the sovereign, their crisis is not over.

Of course, there is more than just spelling differences (and six months) between Iceland and Ireland. They also enjoy a completely different monetary environment to Ireland and the Eurozone bloc, out of which they can build a recovery on terms that we could not reasonably consider.

Scofflaw · 11-06-2011 07:03PM

later10 wrote: »

Yes, devaluation and capital controls really worked out well for the sovereign in this respect.

Of course, Icelandic banks still have an awfully long and difficult road ahead of them, and restructuring is still not really a feature. While this is good for Iceland, or particularly for the sovereign, their crisis is not over.

Of course, there is more than just spelling differences (and six months) between Iceland and Ireland. They also enjoy a completely different monetary environment to Ireland and the Eurozone bloc, out of which they can build a recovery on terms that we could not reasonably consider.

True - their bonds are denominated in Icelandic currency, so their government can always print to meet the obligation if necessary. Perhaps more importantly, their deficit is 3% - a stage by which we too expect to have been able to re-enter the markets.

cordially,
Scofflaw

gizmo555 · 11-06-2011 07:47PM

Scofflaw wrote: »

True - their bonds are denominated in Icelandic currency, so their government can always print to meet the obligation if necessary.

Not so. As the article above mentions, the bonds just issued are dollar denominated.

Scofflaw · 11-06-2011 09:12PM

gizmo555 wrote: »

Not so. As the article above mentions, the bonds just issued are dollar denominated.

I stand corrected. For some reason I thought karlth had said that they were IS-denominated with the amount given in dollars, but looking back, I see he didn't, so I'm not sure where I got the idea from. In fact, the positivity probably relates more to the fact that they have the money on hand to cover the issue:

Reykjavik has stressed that, with $6.7bn in foreign currency reserves at the end of April, it could repay the €454m of bonds falling due this year and next without raising fresh funds.

However, the IMF said this week it was a good idea for Iceland to return to the markets as soon as possible. The country last issued a bond in 2006.

“It’s a very strong signal of normalisation of Iceland’s relationship with the international capital markets and that’s an important signal of confidence going forward,” said Julie Kozak, the IMF’s mission chief to Iceland.

The IMF last week approved a fifth tranche of loans worth $225m to Iceland and the $2.1bn aid programme is due to end in August.

Iceland has suffered its deepest recession on record since its three biggest banks – Landsbanki, Kaupthing and Glitnir – collapsed in October 2008 after years of reckless expansion.

Money on hand to pay off all maturing debt for a couple of years...now that would be nice.

cordially,
Scofflaw

Sand · 12-06-2011 10:02AM

Of course, there is more than just spelling differences (and six months) between Iceland and Ireland. They also enjoy a completely different monetary environment to Ireland and the Eurozone bloc, out of which they can build a recovery on terms that we could not reasonably consider.

Both Ireland and Iceland have certain advantages and disadvantages (given Irish propensity to devalue, official Ireland may be jealous of the Icelandic ability to devalue but its actually a double edged sword) when facing their dilemmas.

The main difference hasnt been the tools available - its been the courage and intelligence with which they have been employed. Iceland and its people have been smart when they needed to be, brave when they needed to be and they have been singleminded in pursuing the course of action that is best for Iceland at all times.

Ireland on the other hand has been too craven and incompetent to ever even attempt to pursue a course which is guided by Irish interests. We have decided to absolve ourselves of the responsibility to making policy in reaction to this, and have hoped instead that the ECB, the EU, Germany, France, etc will make some decisions which might actually be in Irish interests.

Investors have seen this and drawn rational conclusions.

later12 · 12-06-2011 12:16PM

Sand wrote: »

Both Ireland and Iceland have certain advantages and disadvantages (given Irish propensity to devalue, official Ireland may be jealous of the Icelandic ability to devalue but its actually a double edged sword) when facing their dilemmas.

The main difference hasnt been the tools available - its been the courage and intelligence with which they have been employed...

Ireland on the other hand has been too craven and incompetent...

Investors have seen this and drawn rational conclusions.

How are you gathering this information? Why do you say that devaluation is a double edged sword in the context of Iceland returning to the bond markets? I would have thought it was staggeringly obvious that huge devaluation and the implemented capital controls were the forbears of the relative stability that Iceland now enjoys - you are now attributing this to other - very very vague factors like ''courage'' - which is basically a suggestion that the markets are swooning at displays of testosterone - so I would like to know why.

Sand · 12-06-2011 01:39PM

@Later10

Why do you say that devaluation is a double edged sword in the context of Iceland returning to the bond markets?

Have you noticed the currency the bond issue was denominated in?

Plus the damage currency devaluation (and thus inflation) does to the wider economy. The idea that currency devaluation is a magical, painless solution to all economic problems is a mysterious myth. Its a choice, with upsides and downsides for people inside and outside of the economy.

which is basically a suggestion that the markets are swooning at displays of testosterone - so I would like to know why.

Youre betraying the assumption that the markets are capable of swooning at displays of anything. This sort of thinking has underpinned the Leave No Bondholder Behind policy which stated that Ireland had to sacrifice its sovereignty to impress the markets. This sort of thinking was wrong headed from the start and missed that if Ireland took on the black hole of the bank losses onto the state balance sheet, that investors would rightly doubt Irelands ability to meet its sovereign liabilities whilst running a huge deficit inside a common currency.

The markets are lending to Iceland because the risk and the return line up. They are not lending to Ireland because the risk and return do not line up.

Courage, in so far as it goes, plays a role in that analysis as Ireland has done everything possible to *avoid* confronting the reality that an awful lot of banks, developers and companies have lost an awful lot of money. At every turn, the can has been kicked down the road, with success measured only in the ability to ignore growing problems for one day longer. Whereas Iceland recognised and confronted its own issues very early on. It stumbled and made mistakes, and it wavered in the face of the threats of economic annialation from the UK and the Dutch...but the Icelandic people found the courage to push it over the line, and the threats from the UK/Dutch have been found to be hollow. Already their projected liability to the UK/Dutch, even under a worst case scenario where they lose the court case (which is far from certain) has been reduced to a few hundred million - a major saving from the billions that they were being shackled with.

And despite the threats and warnings that no one would lend to them - here they are, back in the markets, borrowing money at rates Ireland can only dream of.

There were and always have been solutions to Irelands problems - our leadership simply lacked the courage or competence to exercise them. Hence Iceland is recovering, whereas Ireland is still facing into grim times.

later12 · 12-06-2011 03:51PM

Sand wrote: »

@Later10
Have you noticed the currency the bond issue was denominated in?

Of course, but the devaluation is pretty much complete as far as anybody can tell, any further devaluation is likely to be relatively small in nature now that Iceland has secured access to capital.

My point was that a devaluation has helped Iceland to get where it is today. It has. Saying that devaluation is a double edged sword is only true in the sense that it has some negative ramifications, but obviously the country can cope with these for now and it does not at all detract from how devaluation and capital controls have aided the sovereign. i think to call it a double edged sword is to imply a counterbalance, when obviously that is not necessarily the case.

Plus the damage currency devaluation (and thus inflation) does to the wider economy. The idea that currency devaluation is a magical, painless solution to all economic problems is a mysterious myth. Its a choice, with upsides and downsides for people inside and outside of the economy.

I would be careful about including inflation (in parentheses) after mentioning a devaluation. While they can go together, sustained, rapid, or serious inflation is not a given when it comes to a currency devaluation. We saw this with some far eastern Asian economies in the late 1990s. In Iceland today, inflation is approximately 0,3% over central bank targets and they have been seeing falling consumer prices since February 2009, with perhaps only two very minor hiccups. This was despite a significant devaluation in the krona. Even now the inflation, reasonable as it is, is only being credited to commodity linked inflation.

While inflation is a concern when dealing with a devaluation, it is not correct to imply that this counterbalances the positive effects of such a devaluation. In that sense, I would reject the notion that devaluation has been a double edged sword for the Icelandic economy.

So what I am asking you is why you are dismissive of devaluation and capital controls on the pace of Icelandic recovery - why are you instead attributing their recovery to ambiguous personal characteristics like "courage"?

Youre betraying the assumption that the markets are capable of swooning at displays of anything. This sort of thinking has underpinned the Leave No Bondholder Behind policy which stated that Ireland had to sacrifice its sovereignty to impress the markets. This sort of thinking was wrong headed from the start and missed that if Ireland took on the black hole of the bank losses onto the state balance sheet, that investors would rightly doubt Irelands ability to meet its sovereign liabilities whilst running a huge deficit inside a common currency.

I'm not denying for a minute that investors are looking at the balance sheet; they are looking at lots of things and the growth, rate of growth and total debt exposure are just some of those.

I'm just rejecting that they are pointing the courage-o-meter in our general direction. The markets don't want courage, they want stability. Pulling an Ireland on it hasn't brought us stability, but it doesn't follow that pulling an Iceland would have been any better.

The markets are lending to Iceland because the risk and the return line up. They are not lending to Ireland because the risk and return do not line up.

Exactly. Courage doesn't come into it. Argentina had "courage" according to some, so did Ecuador, and so did Mexico and so did Greece according to others. There is no empirical measure of courage, it is a vague and an unhelpful term that has no basis in sovereign ratings nor in determining reaccess to capital markets in itself.

And despite the threats and warnings that no one would lend to them - here they are, back in the markets, borrowing money at rates Ireland can only dream of.

I wouldn't go that far, it's a 4.993% semi annual yield on €1bn. Ireland has drawn down about €16bn in the region of 5.5%, a rate that the Government expect will fall; not quite the same as dreaming.

beeftotheheels · 12-06-2011 04:04PM

later10 wrote: »

I would be careful about including inflation (in parentheses) after mentioning a devaluation. While they can go together, sustained, rapid, or serious inflation is not a given when it comes to a currency devaluation. We saw this with some far eastern Asian economies in the late 1990s. In Iceland today, inflation is approximately 0,3% over central bank targets and they have been seeing falling consumer prices since February 2009, with perhaps only two very minor hiccups. This was despite a significant devaluation in the krona. Even now the inflation, reasonable as it is, is only being credited to commodity linked inflation.

In our swooning over Iceland I think we generally tend to miss a couple of important distinguishing facts which may go some way to explaining the lack of inflation and they are both to do with basic geography.

The first is that Iceland is miles away from anywhere else which always rendered imports expensive.

The second is that they are sitting on a fault line so have tonnes of thermal energy (for heating) and cheap electricity which they cannot export due to point 1.

As a result of these two key points they are more immune to imported inflation than we would be, their use of fossil fuels is lower, their food imports are lower (they use thermal energy to heat greenhouses to produce peppers, tomatoes etc), their diet is still rich in locally produced fish and meat. So while cars may get more expensive, people are unlikely to be buying cars in a recession, but they will still be eating and heating their homes.

The other point is that their serious FDI is based there to take into account their cheap electricity to smelt aluminium, so their FDI was less threatened than ours was by any perceived instability since geography dictates that Iceland will have buckets of cheap hydro/ geothermal electricity regardless of the state of their wider economy.

In some ways geography left them uniquely positioned to devalue without importing rapid inflation.

DeVore · 12-06-2011 04:17PM

Markets dont have memory because markets are not humans. True they are made up of humans but anyone who has read about "emergence" will know that its not the same thing.

The God of the market is money. Or more specifically, profit. Its not emotional, its not vengeful, its nothing but business. Because anything else either wastes or reduces or god forbid, *misses* profit.

They dont care that Iceland reneged beyond factoring in the chance of them doing it again in the future (pretty low). Once thats built into the price, there is no emotional desire to punish them, no irrational fear of default. Its quite literally, just business.

I've worked closely with stock brokers for years in my "previous life"

... believe me, they would laugh at the idea of anything but accurate analysis of exactly how much they should wager in order to make maximum profit on the bond market.

There is a very good reason Iceland is at 4.4% while we are at 10%+ on the bond market ... and its the only *ONLY* reason they think about: Iceland is lower risk then us.

That is quite literally what that means.

DeV.

thebman · 12-06-2011 04:17PM

What people also ignore with regard to Iceland is the period between when they were in major trouble to them now entering the bond markets again.

This was not a fun time to live in Iceland. There are articles online about it.

I won't argue one way or the other on Ireland going down the same route here but seriously, read up on it before suggesting we try the same road as Iceland which we can't really do anyway.

DeVore · 12-06-2011 04:25PM

Do you think the next decade is going to be fun in Ireland?

Within 2 years I expect the public service to collapse in this country. Have a think about what that means and believe me, Iceland will start to look like paradise.

DeV.

thebman · 12-06-2011 06:26PM

DeVore wrote: »

Do you think the next decade is going to be fun in Ireland?

Within 2 years I expect the public service to collapse in this country. Have a think about what that means and believe me, Iceland will start to look like paradise.

DeV.

Well I never said it was going to be fun here but if we manage our debt and cut our cloth to measure, I think we can still come out of this without defaulting on any major debts which considering how much we have spent and the years of going nowhere so far, not much point in caving in now really and defaulting and taking all the pain of that option too.

the groutch · 12-06-2011 06:27PM

this might be a stupid analogy, but the Icelandic governement made the right call by "ripping the plaster off in one go", ie. more painful, but over and done with quicker.

of course our current government will never see it that way

thebman · 12-06-2011 06:41PM

the groutch wrote: »

this might be a stupid analogy, but the Icelandic governement made the right call by "ripping the plaster off in one go", ie. more painful, but over and done with quicker.

of course our current government will never see it that way

Well what many people are arguing is that we have taken the plaster off half way slowly and now rip it off fast.

I'm not sure this is the right course of action or not. Certainly I'm not sure anyway can be as certain as the people screaming we should do it.

If we were at the start of the crisis, I would probably go for a lot of pain and get it over with but we are in our 4th year of the crisis. If we did it now, I think many people would go under with the pressure a quick attempt at resolving the crisis would bring now.

later12 · 12-06-2011 06:58PM

DeVore wrote: »

Markets dont have memory because markets are not humans. True they are made up of humans but anyone who has read about "emergence" will know that its not the same thing.

The God of the market is money. Or more specifically, profit. Its not emotional, its not vengeful, its nothing but business. Because anything else either wastes or reduces or god forbid, *misses* profit.

They dont care that Iceland reneged beyond factoring in the chance of them doing it again in the future (pretty low). Once thats built into the price, there is no emotional desire to punish them, no irrational fear of default. Its quite literally, just business.

I've worked closely with stock brokers for years in my "previous life" ... believe me, they would laugh at the idea of anything but accurate analysis of exactly how much they should wager in order to make maximum profit on the bond market.

There is a very good reason Iceland is at 4.4% while we are at 10%+ on the bond market ... and its the only *ONLY* reason they think about: Iceland is lower risk then us.

That is quite literally what that means.

DeV.

The thing about Iceland is that the argument is an historical one.

Even if the Iceland option were ever viable for Ireland, and I don't think it actually was, that moment has been and gone.

Iceland did not engage in a sovereign default. It did not take on its banks' wholesale - we did. That might have been unfortunate, it might have been necessary, it might have been stupid - whatever. We did it. We now have to deal with that; wishing that we were in Iceland's position re:re-access to capital markets (as we do) is fine, but it isn't a solution nor a helpful suggestion.

It is just an observation of that fact that if we were somebody else, we would be somebody else. You know what my aunt would be if she were a man?

By the way, I quoted this particular post because of the statement to do with markets having memory. They do have a memory, their hippocampus is called the Credit ratings agencies. True, they do not always distinguish between defaulters and certain non-defaulters who quasi-defaulted and were bailed out, but the markets certainly, certainly, have memories.

Sand · 12-06-2011 07:27PM

@Later10

The thing about Iceland is that the argument is an historical one.

Even if the Iceland option were ever viable for Ireland, and I don't think it actually was, that moment has been and gone.

Iceland did not engage in a sovereign default. It did not take on its banks' wholesale - we did. That might have been unfortunate, it might have been necessary, it might have been stupid - whatever. We did it. We now have to deal with that; wishing that we were in Iceland's position re:re-access to capital markets (as we do) is fine, but it isn't a solution nor a helpful suggestion.

Youre right to a certain extent - truly stupid policies have been pursued since 2007/2008 and they are truly, dangerously stupid decisions with results and implications that are very hard to reverse, with effects that will deeply harm Ireland for a decade or more. The best we can hope for is damage limitation.

But there are still useful lessons to be drawn from Icelands progress. Firstly, they represented their own interests first and foremost. Secondly, they ignored the scaremongering threats that promised theyd be wiped from the face of the earth if they pursued policies in their own interest.

All throughout the crisis, people who have proposed decisive actions in Irelands interest have been told that Ireland *cant* do that, or the sky will fall in. They have been told that the market is run by sulky teenagers who engage in bitter personal vendettas. They have been told that Irish interests and the interests of the ECB and the wider EU member states are one and the same. They have been told that Ireland has no negotiating position whatsoever and ought to merely surrender and hope the Germans take pity on us. They have been told that we cant close the deficit because it would be bad for the economy.

We are in an awful, awful position because unfortunately those views have dominated the policies that have been pursued.

But despite all that, we can still make a choice to represent our own interests, and to do so without apologies to anyone. That choice at least would mean we would achieve the least worst outcome from our current position. Or we could continue to be too afraid to represent our own interests, and continue in the deluded hope that Sarkozy and co will represent them for us.

later12 · 12-06-2011 08:19PM

Yes I think I could agree with that. Iceland has come back from armageddon, which does give rise to the question as to how valid its armageddon actually was. While we might never have been Iceland specifically, we certainly might take some lesson from them with regards to challenging the dominant paradigm.

I do agree that we have to maintain our own interest, first and foremost. While I think that Europe and the monetary bloc are still held in far too much reverence, both by the Government and by some commentators, our interests align more often than they collide.

We do not have to agree with Europe, we do not even have to like Europe. But we have to know the difference between shooting ourselves in the foot because it is good for us, and shooting ourselves in the foot in spite of Europe.

Either way, when you shoot yourself in the foot, you might as well have someone to take you to A&E.

karlth · 05-05-2012 10:45AM

FYI:

Iceland's Bond Sale Sees Strong Demand From US Investors

Iceland saw strong demand from mostly U.S.-based investors for its $1 billion bond in a deal that garnered interest from more than 210 accounts, one of the bankers working on the deal said Friday.

The offering was more than four times oversubscribed, with the order book reaching more than $4.1 billion.

The 10-year bond priced late Thursday at 407.8 basis points over Treasurys and yielding a 5.875% coupon. Deutsche Bank AG, JPMorgan Chase & Co. and UBS AG were the banks on the deal.

--

Comment: The rate is considerably higher than the one Ireland is getting through ECB and IMF but the difference is that this is in an open market.

SugarHigh · 06-05-2012 04:33PM

karlth wrote: »

The 10-year bond priced late Thursday at 407.8 basis points over Treasurys and yielding a 5.875% coupon. Deutsche Bank AG, JPMorgan Chase & Co. and UBS AG were the banks on the deal.

Wasn't last years bond yield 4.4%? Why the increase?

DeVore wrote: »

Do you think the next decade is going to be fun in Ireland?

Within 2 years I expect the public service to collapse in this country. Have a think about what that means and believe me, Iceland will start to look like paradise.

DeV.

Well we're 1 year in and I'm not seeing signs of this collapse.

karlth · 06-05-2012 05:12PM

SugarHigh wrote: »

Wasn't last years bond yield 4.4%? Why the increase?

Last year's bonds were fixed for 5Y. This year it was 10Y.

Noobsaibot21 · 07-05-2012 10:34AM

I find this a very helpful (if slighltly dumbed down) site to keep an eye on world economies. May be slightly out of date - UK is in recession - but is pretty accurate for the most part.

http://www.economy.com/dismal/map/default.asp

ireland could never have done an Iceland because we are in the Euro (same reason Greece cant) Shame, that.

FreudianSlippers · 07-05-2012 10:36AM

5.875% is not fantastic is it? I think ours are somewhere around 6.85%

Iceland re-enters the bond markets

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