Aim to Sell 25% of State-Owned Íslandsbanki at First

Bjarni Benediktsson kynning fjármálafrumvarp 2021

The Icelandic government plans to sell 25% of shares in Íslandsbanki bank, which is currently fully state-owned, according to a report published by the Ministry of Finance yesterday. Within a longer timeframe, however, the government aims to sell most or all of its shares in the bank. Reducing state ownership of financial institutions has been an aim of Iceland’s financial policy in recent years and is part of the current coalition’s government agreement.

Iceland Review reported yesterday that Minister of Finance Bjarni Benediktsson had approved a proposal from the state holding company ISFI to sell Íslandsbanki. At the time it was not known what percentage of state’s shares would be put up for sale, but the Ministry’s new report states it will be 25%, to begin with. The shares will be sold in a public offering, after which all shares in the bank will be listed on a regulated securities market in Iceland.

The sale of Íslandsbanki has been in discussion for some time. The sale is intended to reduce government risk as well as help mitigate the treasury deficit expected next year as a result of the pandemic.

Read More: Sale of State-Owned Banks in Iceland

The Icelandic government owns a bigger proportion of its country’s banks than any other government in Europe. Two of the country’s three largest banks are in state ownership: Íslandsbanki (100%) and Landsbankinn (98.2%). There are no plans to sell Landsbankinn at this point.

Iceland’s three largest banks – Íslandsbanki, Landsbankinn, and Arion Bank, were established as state-owned institutions on the ruins of other banks that became insolvent during the 2008 crash. Arion Bank has since passed into private ownership while the other two are state-owned.

The Minister of Finance has stated that Íslandsbanki’s value is between ISK 130-140 billion ($1.0-1.1 billion/€834-898 million). The sale income will be used to pay down treasury debt and increase the state’s scope for social investment, according to the Ministry’s report.

Government to Sell State-Owned Íslandsbanki

Iceland’s government will likely sell one of three state-owned banks this coming spring. The bank in question is Íslandsbanki, though it is not clear what percentage of the bank, now fully state-owned, will be put up for sale. The sale is intended to reduce government risk as well as meet the government deficit expected next year as a result of the pandemic.

According to a government notice, Iceland’s Minister of Finance Bjarni Benediktsson has approved a proposal from the state holding company ISFI to sell Íslandsbanki. The Minister will now prepare a report, to be reviewed by Parliamentary committees and the Central Bank of Iceland. After considering their comments, the Minister will make a final decision on whether to begin the sale process, expected by January 20.

What percentage of the bank is to be sold is not yet known, though earlier this year government ministers discussed a possible sale of 25-50% of its shares. The aim is to sell shares in a public offering and subsequently list all shares in the bank on a regulated securities market in Iceland.

Iceland an Outlier in State Ownership of Banks

The Icelandic government owns a bigger proportion of its country’s banks than any other government in Europe. Two of the country’s three largest banks are in state ownership: Íslandsbanki (100%) and Landsbankinn (98.2%). Reducing state ownership of financial institutions has been an aim of Iceland’s financial policy in recent years and is part of the current coalition’s government agreement. The sale of Íslandsbanki has been in discussion for some time.

Read More: Sale of State-Owned Banks in Iceland

The government notice states that market conditions now appear to be favourable for the sale, in addition to which the bank is in a good financial position. Its sale is intended to reduce government risk in the financial system, promote competition in the banking industry, and increase domestic investment opportunities for individuals and professional investors.

The COVID-19 pandemic and the government’s economic response measures are expected to result in a deficit of around ISK 320 billion ($2.5 billion/€2.1 billion) in 2021. “With the sale, we mitigate the blow of the coronavirus crisis considerably, in addition to which it makes it easier for us to finance continued measures for people and businesses,” stated Finance Minister Bjarni Benediktsson.

Investment, Not Cuts, in 2021 Budget Bill

Bjarni Benediktsson kynning fjármálafrumvarp 2021

The main goal of the government’s new five-year budget plan is to stop accumulating debt by the end of 2025. Minister of Finance Bjarni Benediktsson presented the government’s 2021 budget bill and its financial plan until 2025 at a press conference this morning. Parliament opens its fall session this afternoon.

Deficit Could Reach ISK 900 billion by 2025

Bjarni stated in the press conference that the ideology behind the bill was to use the state’s strong financial position to tackle the current recession using investment rather that cuts. Iceland’s treasury has been improving its debt ratio in recent years, which puts it in a good position for taking loans in order to invest in the short term. Borrowing money and operating at a deficit over the coming years, says Bjarni, is expected to leave Iceland’s economy in a better position after the recession in terms of GDP and employment. Tackling the crisis by making drastic cuts, he stated, is “really not an option.”

The treasury’s deficit is expected to amount to ISK 265 billion ($1.9 billion/€1.6 billion) next year and could amount to as much as ISK 900 billion ($6.5 billion/€5.5 billion) by the end of 2025. Annual deficit is expected to decrease year on year, and the main goal of the budget plan is that the treasury’s debt ratio stops worsening by the end of 2025.

Local COVID-19 Restrictions Influence Spending

Bjarni showed statistics on how Icelanders’ spending habits correlated with the rise and fall of domestic infections. Icelanders’ domestic consumption rose by as much as 20% this summer, when COVID-19 restrictions were eased and infection rates were low, but fell significantly during the height of outbreaks this year and under the tightest restrictions. These numbers demonstrate the economic importance of containing the SARS-CoV-2 virus locally, according to Bjarni.

Iceland’s GDP is expected to drop 7.6% this year, according to Statistics Iceland’s newest forecast. The projections for 2021 are less dire, expecting a recovery and 3.9% growth.

In Focus: Sale of State-Owned Banks

sale of state-owned Icelandic banks

For years, Iceland’s government considered selling 25-50% of Íslandsbanki bank, currently fully owned by the State Treasury. Reducing state ownership of financial institutions was a turnaround in Iceland’s financial policy that had been in development for years. With memories of the banking collapse still strong in the minds of the public, many were opposed to […]

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