External debt

Interbank positions and other transactions between resident and non-resident deposit-taking corporations are classified as deposits.

Trade credit is a claim generated when a provider of goods or services grants a customer an extension of time to pay or receive advance payment for goods or services. The trade-credit and advances derive from the fact that payment for the goods or services is not remitted at the time the goods are delivered or the service provided.

When an investor in one country owns 10% or more of the share capital of a company in another country, it is called Foreign Direct Investment. It is assumed that when the holding is this large or larger, it is the investor's intention to influence the management and policy of the company and to establish a long-term business relationship. The investor's loans (his contribution other than equity) or companies owned by him are considered as his additional investment in the company in question.

In the banks publication of direct investment the directional principle is followed. According to the principle, reverse investment between related parties in excluded and loans, between an investor and a company owned by him, are netted out and entered to either the assets or liabilities side, depending on whether the investor is a resident or a non-resident. Special purpose entities are excluded in the directional principle.

Direct investment in the balance of payments statistics as well as in the external position of the economy is presented according to the so-called asset and liability principle, which implies that asset and liability items are on a gross basis (claims between parent and subsidiary are not netted against each other). For example, this presentation implies that a domestic investor's loan to a foreign company owned by him is presented on the liability side of the external position of the economy but is not netted against the investor's loan claims on the foreign company on the asset side.

Loans between an investor and enterprises that are linked to it in a direct investment relationship are not considered direct investment if both parties are depository institutions, mutual funds or other financial institutions other than insurance companies and pension funds. In such cases, the loan is classified as other investment.

Real estate transactions are classified as direct investment. Investment in real estate is not considered a financial instrument and is special in that respect. Real estate transactions can be with individual real estate but also as real estate companies or holding companies.

Bonds are transferable financial instruments that are valid proof of a debt and are offered for sale in an offering in which all the main features of the bonds in each class are the same, including the name of the issuer (debtor), first interest date and provisions on repayment, interest rate and calling as appropriate. Marketable bonds are made to be bought and sold in the market, either on a stock exchange or directly over the counter between parties.

Types of bonds in Central Bank statistics:

Indexed market bonds
The principal changes in accordance with a certain index and is usually issued in Icelandic krónur. This includes, for example, housing bonds, housing fund bonds, HFF bonds, indexed Treasury bonds (RIKS) and indexed bonds issued by commercial enterprises, financial undertakings and municipalities.

Other marketable bonds and bills
The principal is not linked to any index - is non-indexed. These bonds can be issued in Icelandic krónur or foreign currencies. These include, for example, non-indexed Treasury bonds (RIKB), Treasury bills (RIKV) and bonds issued by commercial enterprises, financial undertakings, municipalities and foreign entities.

Equity
A shareholder’s claim on a given shareholding in a company. A public limited company issues special documents (shares) to prove that the owner of the equities (shareholder) holds a share in the company’s assets and annual profits. Shares are usually commercial papers, i.e. they can be bought and sold as specified in the company’s articles of association, either on a stock exchange or directly over the counter between parties. Upon dissolution of a company, shares become payable after all other debts of the company in question have been paid.

When an investor owns less than 10% of a company, it is considered a securities holding. If the share is larger, it is considered a direct investment and is classified as a share in an associated undertaking or affiliated undertaking.

Associated undertaking
An undertaking where direct and indirect ownership amounts to between 10-50% of the equity or voting rights.

Affiliated undertaking
A subsidiary of an undertaking, its parent company, or a sister company (i.e. a company under the same parent company). The condition is that the ownership stake amounts to > 50%.

Investment fund shares
Financial instruments confirming the claim of all owners of units in an undertaking for collective investment in transferable securities (UCITS) or in its separate divisions, to that fund’s securities holding. All holders of units have an equal claim on the income and assets of the undertaking or of its respective divisions, in proportion to their holdings in the total number of issued unit shares.

Equity liabilites
Equity is the entire shareholdings of the owners of an undertaking. Equity corresponds to the difference between assets and liabilities.

Other equity is equity not in the form of securities. It can include holdings in branches, trusts, and limited partnerships. Holdings in many international organisations are not in the form of securities and are therefore classified as other equity.

Currency and deposits consist of banknotes and coins in circulation, plus deposits. Deposits
Currency and deposits consist of banknotes and coins in circulation, plus deposits. Deposits are standardised, non-negotiable agreements offered by deposit-taking corporations. The term of deposits can vary, depending on the agreement. Deposits generally imply that the debtor is obliged to return the principal to the investor. They can be held in central banks or in deposit-taking corporations.

Deposits are non-transferable agreements between a deposit-taking corporation and another party where funds are deposited in an account in a deposit-taking corporation for a long or short term return. Deposits can be retail deposits or wholesale deposits. Wholesale deposits are deposits for which the terms and duration of the relevant deposits have been specifically agreed upon either directly with the relevant deposit-taking corporation or through a money market broker. Such deposits are generally not available to regular savers and their terms are not standardised. Retail deposits are deposits in standard accounts with advertised terms and duration.

Loans are non-transferable financial instruments where a lender lends money directly to a borrower and have fixed, predictable payments. Loans are generally non-transferable, but if loans become transferable from one owner to another, their classification is changed to marketable bonds. For loans to be reclassified, market transactions must take place.

Redeemed liabilities
Loans which a financial undertaking has reclaimed but has not yet demanded payment for from guarantors.

Overdraft facilities
Overdraft on a current account. This also includes debts due to payment cards.

Bills of exchange  
Written orders in a specific format from an issuer to a drawee to pay a certain amount to a third party. Bills of exchange can be bills of exchange against another person or an own promissory note. A bill can also be an own promissory note whereby the issuer undertakes to pay the stated amount on the date of maturity. Most bills are non-indexed and generally used for short-term financing (4 months or less). Bills are generally not issued for a longer term than one year.

Indexed loans
A bond whose principal changes in accordance with a certain index that ensures that the bond maintains its value. Bonds are written undertakings by an issuer (borrower) to pay another party (the lender) a specified amount including interest for a certain period of time and to repay the loan on its date of maturity. Indexed bonds according to the Central Bank of Iceland's rules No. 218/2023 on Price Indexation of Savings and Loans are based on the Consumer Price Index.

Other loans and receivables
Non-indexed bonds and receivables other than accounts receivable. A receivable is a legally protected authorisation by one party to demand payment from another party, i.e. the debtor. This also includes non-indexed interbank loans and claims against subsidiaries.

Purchase lease agreements
Synonym for financing lease and hire-purchase agreements. They differ from direct loans in that they involve the lender buying the liquidity or asset requested by the customer and subsequently renting it to the customer for a pre-negotiated term. Ownership is therefore the main collateral for the lender.

Collateral loan
The Central Bank can grant loans for both short and long terms, but all loans granted by the Central Bank are secured loans, as the bank may only lend against collateral that the bank deems eligible. The rates on 7-day collateralised loans form the centre of the interest rate range.

Securities lending
Securities lending with cash collateral

Provisions
Provisions are precautionary entries made by lenders in connection with recoveries on loans. Provisions are made based on the assessment of expected loan losses due to specific customers.

Unused credit lines are not classified as loans as they are not debts but obligations.

Overnight loans
Loans that counterparties in transactions with the Central Bank can apply for on their own initiative, if they can put up collateral that the Central Bank deems eligible. Overnight loans are loans until the next business day.

Collateral loans
Loans against collateral in securities. The Central Bank lends against collateral in securities and the agreement is reversed after 14 days. Counterparties submit eligible securities, according to the bank's list of securities eligible as collateral.

The insurance, pension, and standardised guarantee schemes that most strongly affect the statistics of the Central Bank of Iceland Iceland’s are non-life insurance technical reserves and pension entitlements. Other categories are life insurance and annuity entitlements, entitlements to non-pension benefits, claims of pension funds on pension managers, and provisions for calls under standardised guarantees.

Pension funds
Fund members’ pension fund assets are not necessarily equivalent to the pension funds’ assets because there are different types of funds. They could be either defined-benefit funds or defined-contribution funds. Defined-benefit funds are of two types: funded and unfunded. Assets in defined-benefit funds are calculated in terms of the fund’s actuarial position. If a defined-benefit fund is funded, it can be assumed that fund members’ assets (their actuarial
position) at any given time are equal to the market value of the fund’s assets. In the case of unfunded defined-benefit funds, however, the funds’ assets could be less than their actuarial position, and the employer is responsible for bridging the gap that develops. Defined contribution funds are always funded; therefore, fund members’ assets at any given time are equal to the market value of the assets in the funds.

Non-life insurance technical reserves
Non-life insurance technical reserves fall into two categories. On the one hand, is a fund for prepaid premiums, and on the other is a fund for outstanding claims that the insurance companies expect to pay for events that have already occurred. These funds constitute the insurance companies’ liabilities and the insured parties’ assets. Their impact on statistics is comparable to that of the pension funds, which is described above.

Other accounts receivable/payable include accounts receivable or payable other than those specified above. They can include tax liabilities, securities transactions, wages, or dividends.

A resident is any individual and legal entity permanently residing in Iceland, irrespective of nationality. Students and embassy employees are exempt from the residency requirement. Therefore, Icelandic students and their families who reside abroad are considered residents, and foreign embassy employees are considered non-residents. Non-residents shall mean all parties except residents.

Remaining maturity is based on the original maturity. Long-term loans and receivables therefore remain long-term loans/receivables even if the effective remaining term is one year or less. The duration of original maturities are either:

Short-term: ≤ 1 year
longer-term: > 1 year