The Treasury's asset and liability statement

The Treasury’s debt position has been under intense discussion in recent days as well as the changes that have taken place since the collapse of the banks in October 2008.

The Ministry of Finance has assessed the changes that have taken place in the Treasury’s assets and liabilities due to these changes, as they stand at the end of 2009.

As is shown in the table below, the total debt of the Treasury is estimated to have increased by just over 400 billion krónur in 2009, in addition to the debt guarantee undertaken by the Treasury in connection with the IceSave/Edge accounts and the loan of the IMF to the Central Bank, amounting to close to 1300 billion krónur.

The net position of the Treasury (debt less assets) will therefore change from a negative net position of more than 8 billion krónur to a negative position of 563 billion krónur. This assumes that the total cost of the Treasury from Icesave/Edge accounts will amount to 150 billion krónur.

The Treasury’s position at the end of 2008
According to provisional estimates, Treasury debt amounted to 666 billion krónur at the end of the year and assets to 658 billion, in additon to the assets and liabilities listed above. The year-end figures on the asset side include the deposits of the Treasury in bank accounts, cash at hand and Treasury claims, such as loans extended. Treasury debt consists of outstanding market securities, domestic and foreign debt. In addition to monetary assests listed above, the book value of enterprises owned by the Treasury amounts to 195 billion krónur.

The Treasury deficit 2009-2012
The 2009 budget was passed with a 150 billion krónur deficit, which constitutes a substantial reversal from the surpluses of previous years due to the current economic conditions. The intention is to resolve the financing needs of the Treasury in 2009 by drawing down 100 billion krónur of the Treasury deposits with the Central Bank and finance the remainder with the issue of securities in the domestic market.

According to the medium-term fiscal programme, the Treasury should be back in balance by 2012 and that the sum of deficits in 2010 and 2011 would amount to 160 billion krónur.

Losses due to surety notes
At the beginning of 2009, the Treasury issued a debt note in the amount of 270 billion due to the takeover of notes issued by domestic financial institutions to the Central Bank as surety against Central Bank credits of 345 billion krónur. These claims arise from loans extended by the Central Bank to financial institutions in accordance with its role as a central bank. It is evident that considerable losses have been incurred from these loans that have eroded the equity capital of the Central Bank below an adequate level. The Central Bank will absorb a share of the loss, reducing its equity capital by 75 billion krónur. The remaining balance is being absorbed by the Treasury through the issue of a debt note to the Central Bank in the amount of 270 billion krónur, taking over the surety notes at the same time. It is estimated that 50-80 billion krónur of the surety notes taken over by the Treasury will eventually be recovered, and that the net loss of the Treasury will thus amount to 220 billion krónur.

Losses arising from loans against securities
According to agreements with the primary dealers in Treasury securities, the dealers could borrow Treasury securities for a defined period against surety notes in order to enable them to fulfil their market-making commitments. At the time of the collapse of the banks, such outstanding Treasury securities lent amounted to 133 billion krónur in nominal value, of which about 40 billion have been recovered. The loss to the Treasury is estimated at 35 billion, since a part of the surety notes were notes issued by Glitnir and Kaupthing. In addition, the Treasury must take over and book as assets surety notes amounting to 65 billion krónur and book the equivalent amount of Treasury securities as liabilities which primary dealers could not refund. The above figures are included in the Treasury’s position at the end of 2008.

Bank refinancing
The equity contribution of the Treasury to the new banks is estimated to amount to 385 billion krónur that will be remitted with marketable surety notes issued in connection with overdraft loans, loans against securities and mortgage loans. The Treasury acquired market securities amounting to 65 billion when it took over securities loans that will be injected into the banks. The Treasury will also purchase the equivalent amount of market securities from the Central Bank issued in connection with the repo and overnight loans of the bank, amounting to 320 billion krónur. The Treasury will also pay the Central Bank for the market securities by the takeover of the Central Bank of previously extended loans by the Treasury in connection with the strengthening of the foreign exchange reserves, amounting to 220 billion krónur and with the issue of a debt note of 100 billion krónur. The market securities of the Treasurty of 65 billion krónur and the Treasury claims on the Central Bank of 220 billion krónur are included in Treasury assets at the end of 2008, and only the part of the equity capital of the banks is included that remains to be financed.

Icesave/Edge
The negotiations regarding the foreign deposits of the banks have not been completed. The estimated loss to the Treasury amounts to 150 billion krónur after the sale of assets of the old banks. The Deposit Insurance Fund shall, according to law, pay from its resources, but the Treasury is responsible for such payments. These guarantee commitments are not included in Treasury debt.

IMF and various countries (loans and credit lines)
A number of countries have declared that they are prepared to extend credits support to Iceland. The IMF loans are extended to the Central Bank and are therefore not counted as Treasury debt. Credit lines of the Nordic countries, Poland and Russia will be in the form of credit lines that will be opened after the first review of the IMF programme in February/March. All loans and credit lines will be administered by the Central Bank that can draw upon them to increase stability in the foreign exchange market through the sale of foreign exchange that constitutes an asset against loans drawn upon. At this stage, it has not been decided, to what extent these loans or credit lines will be used.

Reykjavík, January 28th 2009