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Iceland external debt

According the Central Bank figures, Iceland’s total external debt as of Q2 2011 amounted to 14,250,850 million. That is nearly 45 million per head if divided by the population (this is not a public debt, however). The reason I’m writing about this is that I’m preparing a short introduction of the Forex Converter at Reykjavik University on Monday for an MSF class and needed some juicy data to spike interest. For a masterclass in Finance, what better material to use than Central Bank external debt statistics? For those that want to know exactly what this figure is:

External debt position, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payments of principal and/or interest by the debtor at some points in the future and that are owed to non-residents by residents of the economy (Iceland). External debt statistics is a subsection of international investment position statistics excluding equity liabilities in direct and portfolio investments. External debt is classified both by main sectors of borrowers –the Central Bank, general government, banks and other – and by maturity into short-term or long-term (original maturity of more than one year). For each sector, debt is specified by instruments: Currency and deposits, loans, trade credit, money-market instruments, bonds and notes, and other debt. Debt in direct investment is stated separately, divided into debt of a resident investor (parent company) to an affiliated enterprise abroad, and claims of a non-resident investor on affiliates in Iceland. Central Bank of Iceland

To put our current debt of 14,250,850 million in perspective, consider that in Q2 2006 the debt total was a mere 4,544,807 million and Q2 2001 only 912,387 million. So in 10 years, total external debt is almost 16 times greater.

One of the primary concerns of Icelanders has always been how we are perceived by foreign parties. This is why news media always ask tourists and visiting celebrities: ‘How do you like Iceland?‘ As if anyone would respond with something negative. The question in itself is leading and forces the answer. Given that we are currently oversensitive to foreign perception, we should aim to present the best and most accurate picture of economic conditions using whatever means possible. For that end and when dealing with monetary statistics in general, the Forex Converter is very effective. The reason is that converting time series data using anything other than either moving average or same day exchange rates will lead to a monumental error in the result. The further back in time the data goes, the greater the error becomes. The chart shows the difference in behavior of using most recent rate (called Spot here although it isn’t real-time), moving average (called Monthly but used to auto-generate bimonthly and quarterly) or the rate that matches series date (Point).

Using the most recent rate on the most recent data creates a slight error. Going further back, however, escalates the problem as shown in this example:

Total external debt Q2 2011 in USD millions: Spot $121,490.6,  Monthly average $123,879.2 (1.97% above) and Point $124,285.6 (2.30% above).

Total external debt Q2 2001 in USD millions: Spot $8,821.6,  Monthly average $8,694.7 (11.78% above) and Point $7,930.6 (13.41% above).

Another method to illustrate this is to compare the increase between the two periods using the different rates:

Q2 2001 ; 2011: Spot 1461.94%,  Monthly average 1324.77% and Point 1308.88%.

Q2 1996 ; 2011: Spot 4772.68%,  Monthly average 2865.25% and Point 2758.72%.

As seen, the debt when expressed in USD didn’t increase by a factor of nearly 48.7; it merely went up by 28.6. The same applies when converting the data to EUR (which has been calculated back to June 25 1993) or other currencies. The Forex Converter factors in the former strength of the currency as seen in the rate chart above and gives a much more accurate reading.

The reason we went into development of the converter was the difficulty of quickly matching series dates to exchange rate dates. Our friends at AlphaBricks solved it elegantly which makes it possible to convert worksheets containing monetary information quickly and accurately.

The chart to the side shows the conversion of Iceland’s external debt to USD and EUR using the three different rates. The blue line is the most recent rate and also the one most wildly inaccurate. Observe how the peaks behave; the monthly average shows pronounced peaks long before the spot rate does and is completely out of sync. For more information:


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