Iceland to Live with Capital Controls until 2015

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Iceland to Live with Capital Controls until 2015

The Icelandic government adopted a revised strategy for gradual liberalization of capital controls in a cabinet meeting on Friday, which includes that capital controls may not be fully lifted until the end of 2015.

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Copyright: Icelandic Photo Agency.

The strategy was developed by the Central Bank of Iceland in cooperation with the Ministry of Economic Affairs, Ministry of Finance and the Financial Supervisory Authority.

Furthermore, consultations were carried out with the International Monetary Fund and advice sought from an external expert with experience in managing and lifting capital controls, a press release from the Ministry of Economic Affairs explains.

The strategy has two main phases. The first phase focuses on releasing so-called offshore króna, which are largely held by foreign residents in bank deposits and government securities.

These offshore króna are estimated at over ISK 400-500 billion (USD 3.5-4.4 billion, EUR 2.5-3.1 billion) or around 25 percent of Iceland’s annual GDP. Their existence has undermined confidence and distorted prices in key financial markets.

It is for this reason that the first phase aims at substantially reducing offshore króna holdings. When sufficient progress has been made to this end, and other conditions have been met, the second phase, focusing on onshore króna, can begin.

The strategy does not include a timeline. The pace of its execution will depend on the evolution of relevant economic conditions and on the outcome of previous steps in liberalization.

The overall approach aims to minimize possible negative effects on currency stability, bank liquidity and the bond market. Numerous small steps will therefore be taken as conditions permit.

Normalization of Icelandic capital markets remains a priority for the authorities. To secure the liberalization of the capital controls without threatening financial stability, the Minister of Economic Affairs will propose to the Icelandic parliament, Althingi, an extension of the temporary provision authorizing capital controls until the end of 2015.

However, the government may lift the controls at an earlier date if conditions permit.

The strategy can be read in full on the website of the Central Bank.

Click here to read more about capital controls, or currency restrictions, as they've also been referred to (the link leads to a story on the EVE Fanfest but it is thre right link; further down there's a reference to currency restrictions).