Ice­land to lift cap­i­tal con­trols by next year

Kuwait Times - - BUSINESS -

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

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