Iceland May Begin Exiting Capital Controls Early Next Year

By Omar R. Valdimarsson

Iceland is working on a plan that may allow it to remove capital controls early next year as officials take the next step toward releasing about $7 billion in funds still locked behind krona restrictions.
“The authorities are motivated to move this process along expeditiously, but not recklessly,” Lee C. Buchheit, a member of Iceland’s task force on the removal of capital controls, said in an interview. “My sense on the authorities is that they would like to move on this early next year.”
The task force met yesterday with the administrators of Iceland’s failed lenders, Glitnir Bank hf, Kaupthing Bank hf and Landsbanki Islands hf, to
listen to their proposals on bypassing krona controls to enable a settlement of their claims. The banks’ $85 billion default in 2008 forced the government to resort to an international bailout to rescue the $15 billion economy.

Capital Controls

Removing controls would mark a final milestone in efforts to rebuild Iceland’s economy. Officials are trying to ensure that steps to scale back capital restrictions don’t result in a krona sell-off that would risk triggering another crisis.

Consensual Solution

In a statement last night, Kaupthing said it “firmly believes that a consensual solution can be achieved through a composition with creditors which ensures finality and is binding for all creditors.” The bank, Iceland’s biggest before its collapse in October 2008, said it has found solutions that would enable settlement “without negatively impacting either the financial stability of Iceland or the ability to lift the capital controls.”
One of the options being considered is imposing an exit tax on capital outflows, according to central bank Governor Mar Gudmundsson. Dismantling the controls without imposing an exit tax is also still on the table, said Buchheit. Two people briefed on the matter said this week an exit tax as high as 40 percent had been discussed as one of a number of alternatives.
“Quite a range of” options have been considered, Buchheit said. Some of which don’t use an exit tax “as an implementation measure.”
The Finance Ministry in Reykjavik set the process for settlement in motion last week, when it granted an exemption from capital controls to LBI hf -- a unit that represents creditors in Landsbanki -- allowing it to repay 400 billion kronur ($3.2 billion) to priority claimants.

Hedge Funds

Creditors that have bought claims against the failed banks include hedge funds Davidson Kempner Capital Management and Taconic Capital Advisors.
Five-year credit-default swaps on Iceland trade at about 140 basis points, about one-tenth their level at the height of the crisis in October 2008, according to data compiled by Bloomberg.
Iceland’s krona has gained about 3 percent against the euro this year, helping stabilize inflation. The central bank said today that below-target consumer price growth allowed it to cut its main interest rate by half a percentage point to 5.25 percent.