Iceland to lift capital controls by next year
Iceland’s remaining capital controls are likely to be completely removed during the course of next year, its central bank governor said yesterday.
Capital controls were imposed after the 2008 financial crisis to save the crown from collapse. But, though these have given the economy some time to recover, the restrictions have left the country and its businesses isolated. The Nordic island, which holds a general election on Saturday, this month took an early step to dismantling curbs when parliament passed a law lifting restrictions on local residents and companies from the beginning of next year.
Now, central bank governor Mar Gudmundsson told Reuters in an interview on Friday, the remaining restrictions could be gone by the end of 2017. “As things stands now, it is quite possible that by this time next year we can say Iceland doesn’t have any capital controls anymore,” Gudmundsson said. “(We need) to have an adequate level of foreign exchange reserves, to have a resilient financial sector that can withstand potential volatility ... It is going in the right direction, but these are early days,” Gudmundsson said.
One of the original reasons for keeping restrictions on funds and high earners was to ensure there was no sudden rush of money out of the country that could then destabilize the economy. Now, with the highest interest rates in western Europe - a 5.25 percent interest rate compared with negative rates in the euro zone, parts of Scandinavia and Switzerland - cash is flowing into Iceland, not out.
“We don’t want this money, we don’t need this money at this point in time ... The high interest rate is not in order to attract capital, which imposes a financial stability risk to us,” he said. The bank, he said, had implemented regulations and tools like restrictions on deposit-taking in foreign branches and was working to introduce limits on forex exchange imbalances and lending to ‘unhedged’ borrowers. “Most of the prudential tools that we want to have in place before lifting the capital controls are in place,” Gudmundsson said. Iceland has been run by a centre-right coalition though Saturday’s election could bring the anti-establishment Pirate Party to power. Parties on all sides have pledged, however, not to block the lifting of capital controls.
GLACIER BONDS ISSUE
However, Iceland remains deadlocked with US funds Autonomy Capital, Eaton Vance, Loomis Sayles and Discovery Capital Management, whose frozen bonds are worth roughly 10 percent of Iceland’s annual economic output, after they spurned what they saw as low government offer to unlock them back in June.
“We are not in this game in order to impose any kind of haircut or anything like that,” Gudmundsson said. “And we have to remember that the offshore and onshore markets are separate markets and that they have different exchange rates.”
“It is obvious that if we are going to buy the positions from them, either in a tender or through other means that it takes two to tango meaning that there will be some kind of interaction further down the road.”
In a bid to avoid a disorderly exit of the some $1.4 billion crown-denominated bonds, nicknamed ‘Glacier bonds’, bought during the crisis and trapped in Iceland ever since, the central bank has held currency auctions to reduce the amount. — Reuters