Iceland sets out plan to unfreeze its currency



Iceland is making its way back to economic normality by lifting the capital controls that have constrained the kronur since the financial crisis in 2008.

The country was hamstrung by its ailing banking industry during the global credit crunch. Now, it has set up hefty exit taxes and several other safeguards in a bid to avoid any further damage to the Icelandic economy and to correct an overhang of frozen currency worth 1,200bn kronur (£5.9bn).

“Today is a very happy milestone…. We are tackling what has been the cloud in the economic sky,” said finance minister Bjarni Benediktsson.

Iceland’s economy is bouncing back after a meltdown during the financial crisis

Iceland, with a population of just under 330,000, allowed its banking sector to balloon to the equivalent of nine times its country’s GDP before the financial crisis.The capital controls were introduced in November 2008, initially as a temporary measure, to prevent money flooding out of Iceland.

The central bank believes there is about 900bn kronur tied up in the estates of the country’s three major failed banks and 300bn in currency held offshore.

The government said the estates of the banks – Glitnir, Kaupthing and Landsbanki – are expected to comply with “non-negotiable stability conditions”, including a payment to the state by the end of 2015. Should they fail to do so, they face a one-off stability tax worth 39pc of their Icelandic assets, totalling up to 850bn krona. After these conditions are met, they can start to transfer funds.

The proceeds of the stability conditions and tax will be used to reduce Iceland’s public debt, which fell to 94pc of GDP last year.

Data from World Bank

Institutions holding offshore kronur will face a wait and a fee before they can convert their money. Iceland plans to offer a currency auction and bond sales to gradually reduce the amount of currency held overseas.

Ten overseas investors own the majority of these deposits, according to Benedikt Grislason, head of the Icelandic task force that worked on the currency plan. He added that those who take part in the currency auction will face a “considerable surcharge”.

Hedge funds, including Davidson Kempner and Taconic Capital Advisors,are reported to be among those who bought up kronur in recent years,and a market for Icelandic currency also exists among several London-based banks.

The Icelandic parliament will receive the bills needed to set up the measures on Monday. Over the weekend, the country’s parliament voted 56-0 in favour of a bill that tightens restrictions on assets within the failed banks, as a precaution against an exodus of money before the broader currency controls are lifted.

The central bank has laid the groundwork for lifting the controls, running several small currency auctions over the past two years that allowed smaller holders of krona to sell out.

Data from World Bank

Iceland’s economy has rebounded since the crisis, with budget cuts combined with growth in tourism and fisheries set to send the economy above its pre-crisis level of output, according to the latest report from the International Monetary Fund.

“It is encouraging that the Icelandic government now feels confident enough to announce the lifting of capital controls. After all, the presence of capital controls has been costly. It has discouraged inward investment, which has fallen from 108pc of GDP in 2008 to 77pc in 2013,” said Jessica Hinds, European economist at Capital Economics.

“Nonetheless, delays are still possible. It remains to be seen whether the creditors of the failed banks’ estates will accept this hefty tax or whether they will take legal action.”



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