Iceland back on track eight years after bank collapse

All you need to know about the lifting of capital controls and Iceland´s economic recovery that made it possible.

Tourism has saved the Icelandic economy.
Tourism has saved the Icelandic economy.
Auglýsing

Capi­tal controls on Icelandic peop­le, firms, and pension funds were lifted on Tues­day (14 March).

The removal of the capi­tal controls was ann­ounced on Sunday, in addition to updates to rules on for­eign exchange and special res­erve requirem­ents for new for­eign cur­rency inflows.

The capi­tal restrict­ions were introd­uced in the wake of Iceland's fin­ancial collapse eight years ago.

In early Oct­o­ber 2008, the Icelandic bank­ing system, which had grown to be twelve times the GDP of Iceland, came crumbling down in a matter of three days. With that crash came a comp­let­ely new rea­lity for Iceland­ers.

The Icelandic Krona lost almost half of its value, inflation soared, unemploy­ment rose to dou­ble-digit figures, emergency laws were put in place, and the Trea­sury, which had been almost debt-free, faced a 216 billion krona def­icit - amount­ing to 12 percent of its GDP.

The country needed to enter an IMF-programme to get access to funds and main­tain a sense of norma­lity.

On 28 Novem­ber 2008, capi­tal controls were put in place to stop the out­flow of Krona-as­sets from the Icelandic economy, to prot­ect the cur­rency, address problems in the balance of pay­ments and temper shocks to the Icelandic economy.

In pract­ice, the controls meant that the freedom to trans­fer funds to and from Iceland was taken away.

Auglýsing

The free movem­ent of capital, secured in the EEA-a­greem­ent with the EU, was de-facto abol­is­hed. Nobody could get for­eign cur­rency wit­hout going through the Central Bank of Iceland.

Reg­ular people had to bring their plane ticket with them to purchase euros in a bank if they were tra­vell­ing to the continent, in order to prove that they were really lea­v­ing the country. All exporters were compelled by law to hand in all for­eign cur­rency revenues to the Central Bank.

Offs­hore owners of Krona were stuck inside the capi­tal controls until further not­ice.

Tourism saves the day

Since 2011, Iceland has experienced a remarka­ble change in fortu­ne.

The country has experienced growth every year since then and this hit record highs in 2016 at a whopp­ing 7.2 percent.

Of the countries that are a part of OECD, only India had a hig­her level of growth.

The rea­son for this was a tourist boom in Iceland. In 2010, around 500,000 people visited the island. This year it is expected that the num­ber of tourists will hit 2.3 milli­on, in a country with around 330,000 inhabit­ants.

Már Guðmundsson, governor of the Central Bank in Iceland.In the last few years the govern­ment has also reached an agreem­ent with the creditors of the failed banks and a num­ber of large offs­hore Krona-owners. This left the Icelandic economy with a sizea­ble haircut taken from creditors' assets to main­tain stability.

Last August, mea­sures were taken to lift the capi­tal controls in gradual steps and, on Sunday, the govern­ment ann­ounced that they will be mostly abol­is­hed them.

“Iceland's careful, mea­sured app­roach to lift­ing capi­tal controls was developed and app­roved with domestic and international supp­ort," said fin­ance mini­ster Bene­dikt Johann­es­son in a press con­fer­ence.

"As a result of this struct­ured plan, our diversified economy is larger than ever before and expected to cont­inue to grow at a robust pace this year. Our susta­ina­ble fis­heries, tourism, tech start-ups and renewa­ble energy sect­ors have grown rapid­ly, provi­ding a strong back­bone to our economy. This move is the crit­ical first step in the new govern­ment's stra­tegy for the country's fin­ancial fut­ure, and we can now look ahead with a healthi­er, stron­ger and more diversified economy,” he add­ed.

The offs­hore krona problem

One of the largest problems that needed resol­v­ing before the capi­tal controls could be fully lifted was the fact that for­eign investors still owned a large amount of offs­hore Krona assets, 195 billion Krona (cur­rently €1.65 billion) to be exact.

These investors have wanted to get out of Iceland for years, but have not been able to do so due to the controls. A deal was needed to red­uce the effect of their exit on the value of the Icelandic Krona.

The Central Bank of Iceland conclu­ded an agreem­ent with some of the owners of offs­hore Krona assets in the last weeks.

Under the agreem­ent, the bank will purchase offs­hore Krona assets from them in an amount equivalent to around 90 billion Krona, at an exchange rate of 137.5 krona per euro, up to 20 percent hig­her than the official exchange rate.

Offs­hore Krona hold­ers that have not made an agreem­ent with the Bank will be invited to do so in the next two weeks. Some of them have however declined the offer alr­ea­dy.

Accor­ding to the Bank’s assess­ment, offs­hore krona assets amounted to app­rox­ima­tely 200 billion Krona at the end of Febru­ary 2017. After the transact­ions ann­ounced the out­stand­ing stock of offs­hore krona, assets will total about 100 billion Krona.

The transact­ions will stave off the risk of large-scale out­flows of offs­hore Krona through the for­eign exchange market, upon the liber­alisation of capi­tal controls, accor­ding to the Central Bank.

Ther­efore, they red­uce the systemic risk associ­ated with a large stock of offs­hore Krona assets, which, in the Bank’s opinion, could have caused monet­ary, exchange rate, and fin­ancial insta­bility.

Positive react­ions

The lift­ing of capi­tal controls has alr­eady had an effect on Iceland´s rat­ings. Stand­ard & Poor´s (S&P) raised Repu­blic of Iceland Rat­ings to 'A/A-1 yester­day. Out­look is stable. S&P say: “We beli­eve that the recent lift­ing of most of the rema­in­ing capi­tal controls and the conclusion of an agreem­ent with the owners of offs­hore krona assets strengt­hen Iceland's external profile. We are ther­efore rais­ing our long- and short-term rat­ings on Iceland to 'A/A-1' from 'A-/A-2.“

Moody‘s Investors Service also issued a positive Comment on the Govern­ment of Iceland yester­day, wit­hout rais­ing Iceland´s credit rat­ing. 

The lift­ing of capi­tal controls has not had extensive effects on the value of the Krona. Before the act­ions were ann­ounced a single Euro cost 115 Krona. After the market closed last Fri­day one had to pay 116,95 per Euro, so the Krona has lost 1.7 percent og its value during the week. 

Despite of the above mention act­ions the Central Bank decides to keep its key inter­est rates at five percent sit­ing cont­inued high growth as the main rea­son. A statem­ent from the Monet­ary Policy Committee stated: “Ind­icators imply cont­inued strong growth thus far in 2017. Job creation is strong, unemploy­ment is low, and the labour part­icipation rate has risen above the pre-crisis peak. Even though importa­tion of for­eign labour pulls in the opposite direct­ion, dem­and pressures in the economy are growing.“ 

A limited version of the art­icle, and wit­hout latest updates, was publ­is­hed in EU Obser­ver last week.

Við þurfum á þínu framlagi að halda

Þú getur tekið beinan þátt í að halda úti öflugum fjölmiðli.

Við sem vinnum á ritstjórn Kjarnans viljum hvetja þig til að vera með okkur í liði og leggja okkar góða fjölmiðli til mánaðarlegt framlag svo við getum haldið áfram að vinna fyrir lesendur, fyrir fólkið í landinu.

Kjarninn varð níu ára í sumar. Þegar hann hóf að taka við frjálsum framlögum þá varð slagorðið „Frjáls fjölmiðill fyrir andvirði kaffibolla“ til og lesendur voru hvattir til að leggja fram í það minnsta upphæð eins kaffibolla á mánuði.

Mikið vatn hefur runnið til sjávar á þeim níu árum sem Kjarninn hefur lifað. Í huga okkar á Kjarnanum hefur þörfin fyrir fjölmiðla sem veita raunverulegt aðhald og taka hlutverk sitt alvarlega aukist til muna.

Við trúum því að Kjarninn skipti máli fyrir samfélagið.

Við trúum því að sjálfstæð og vönduð blaðamennska skipti máli.

Ef þú trúir því sama þá endilega hugsaðu hvort Kjarninn er ekki allavega nokkurra kaffibolla virði á mánuði.

Vertu með okkur í liði. Þitt framlag skiptir máli.

Ritstjórn Kjarnans: Sunna Ósk Logadóttir, Þórður Snær Júlíusson, Erla María Markúsdóttir, Arnar Þór Ingólfsson, Eyrún Magnúsdóttir og Grétar Þór Sigurðsson.


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