Chilly reception for Icelandic bonds
By Ivar Simensen
Published: March 22 2006 18:39 | Last updated: March 22 2006 18:39
Iceland did not sell any government bonds in its latest monthly auction on Wednesday, reflecting the uncertainty surrounding the country’s overheated economy.
The Icelandic debt management agency did not accept any bids for the bonds, saying the yield investors demanded was too high to make a sale worthwhile.
Iceland offered to sell up to IKr5bn of bonds with a four-year maturity, but only received bids worth a total of IKr3.7bn from 13 investors. The investors demanded a yield of 8.52 per cent on average to buy the bonds, which the debt management office declined. This was the second successive month that Iceland failed to sell any bonds at auction.
The last time it auctioned the bonds, in January, the average yield was 8.11 per cent, which was up from a range of 7.2-7.8 per cent in last year’s auctions.
Icelandic government bonds have dropped this year, sending yields sharply higher, amid investor concern about the state of its economy.
The Icelandic stock market nearly quadrupled from the summer of 2003 and property prices in Reykjavik have roughly doubled in the same period. A negligible unemployment rate has driven inflation and consumer spending higher.
On Tuesday, analysts at Danske Bank forecast a financial crisis and a severe recession in the Icelandic economy. They said the economy would contract by 5-10 per cent over the next two years, as investments and consumer spending dropped as much as 40 per cent and 10 per cent respectively.
However, some economists disagree with the gloomy forecasts. Ingolfur Bender, head of research at Glitnir, formerly Islandsbanki, said a falling currency and rising exports, particularly from the aluminium sector, would balance falling consumption and investments.
He forecast the Icelandic economy would grow 4.3 per cent this year and contract 0.1 per cent next year.
The main Icelandic banks have in recent weeks all issued statements to reassure the market about their liquidity. They also argue that the expansion of the private sector has been mainly abroad, which has reduced their dependence on the domestic economy.
The krona, which has dropped about 17 per cent since mid-January, recovered losses to end little changed at IKr71.40 against the dollar on Wednesday. The Icelandic benchmark stocks index rose 1.4 per cent to 6,232.6.
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