Capital controls plan: reactions

The Icelandic go­vern­ment announced yester­day its plan to lift capital controls in Ice­land. Capital controls have been in place since No­v­em­ber 2008.

They were put in place in respon­se to the collap­se of all three of the coun­try’s maj­or pri­vately ow­ned comm­ercial banks and the ensu­ing fin­ancial cris­is.

At a press con­f­erence yester­day, Prime Mini­ster of Ice­land, Sig­mund­ur Davíð Gunn­laugs­son, and Mini­ster for Fin­ance, Bjarni Bene­dikts­son, present the go­vern­ment’s plans to finally lift controls.

News items co­ver­ing yester­day’s events can be found on Ice­land Monitor’s ‘Capital Controls’ topic page here.

The plan is pitched as a soluti­on to the potential risk of a massi­ve out­flow of cur­rency from the Icelandic economy upon lift­ing controls and a wea­ken­ing of the Icelandic króna (ISK).

The sum of mo­ney consi­d­ered to be at risk in a post-capital-control Ice­land, known in Icelandic fin­ancial jargon as ‘the over­hang’, is ISK 1.2 trilli­on (app­rox. €8 bill­i­on). Three-quart­ers of this amount is made up of the bankrupt esta­tes of the three collap­sed banks (Glitn­ir, Kaupþing and LBI), while the remain­ing quart­er is made up of for­eign-ow­ned as­sets in offs­hore ISK.

Accord­ing to a Min­is­try of Fin­ance statement yester­day, the main po­ints of the go­vern­ment plan are as follows:

• A comprehensi­ve stra­tegy for capital account li­ber­alisati­on.
• A soluti­on to the ISK 1.2 trilli­on problem, while guar­an­teeing stability.
• Stability conditi­ons and stability tax on the esta­tes of fai­led banks.
• A cur­rency aucti­on for holders of offs­hore ISK in the aut­umn.

In his open­ing speech at yester­day’s press con­f­erence, Prime Mini­ster Gunn­laugs­son refer­red to the plan as “un­ique and un­precedented mea­sures taken in respon­se to a un­ique and un­precedented situati­on”.

Iceland’s Mini­ster for Fin­ance and Economic Affairs, Bjarni Bene­dikts­son, hai­led the announcement as a “sat­is­fy­ing milest­one” for the Icelandic economy.

Már Guðmunds­son, Go­vern­or of the Central Bank of Ice­land, followed the PM and Bene­dikts­son at the lectern and con­fir­med that the go­vern­ment’s proposed mea­sures “ai­med to significantly reduce the amount of ISK as­sets attempt­ing to lea­ve the economy upon lift­ing capital controls”.

Cred­itors of the three collap­sed banks were in­for­med of the ‘stability conditi­ons’ laid down by the go­vern­ment as part of Iceland’s capital control plan and have al­rea­dy su­bmitted proposals for avail­ing themsel­ves of them. These proposals have been deemed to comply with the relevant gui­del­ines.

Cred­itors will have the rest of the year to negotia­te a specific ‘stability contri­buti­on’ with the State. Ot­herwise, from 2016, they will face a 39% tax on their as­sets.

The mar­ket reacted well to the go­vern­ment’s announcement, with the Icelandic Stock Exchange (OMX­I8) ris­ing by 1.7% in und­er two hours.

The plan also app­e­ars to enjoy a good degree of cross-party con­sens­us, as evi­denced by the near un­ani­mous supp­orted garn­ered in the Icelandic Parlia­ment (‘Alþing­i’) by the first piece of leg­islati­on for lift­ing capitals controls, which was passed on Sunday.

Árni Páll Árna­son, lea­der of the main oppositi­on party, the Social Democratic Alli­ance (‘Sam­fylk­ing­in’), stated in Alþingi yester­day that the go­vern­ment’s plan looked good, “better than mig­ht have been expected”, at any rate.

Árna­son expressed the oppositi­on’s desire to work hand-in-hand with the go­vern­ment to ensure proper imp­lementati­on of the go­vern­ment’s ideas, an of­fer gracious excepted by Fin­ance Mini­ster Bene­dikts­son.

He fur­t­her po­in­ted out that it was the decisi­on of the previ­ous go­vern­ment (led by the Social Democratic Alli­ance) to bring for­eign as­sets in the bankrupt esta­tes of the collap­sed banks und­er capital controls back in 2012 that made the mea­sures announced by the cur­rent go­vern­ment yester­day possi­ble.

Guðmund­ur Stein­gríms­son, lea­der of the Bright Fut­ure Party (‘Björt framtíð’) also warm­ly welcomed the go­vern­ment’s plan. “To my mind, this plan brings the matter onto a responsi­ble cour­se and wit­hin a responsi­ble framework,” he stated, add­ing the import­ance that the mo­ney in qu­esti­on “goes to the State […] and does not go into the electi­on fund of the go­vern­ing parties before the next gener­al electi­ons”.

The PM clarified later in the day yester­day that a lar­ge part of the estima­ted ISK 850 bill­i­on (app­rox. €5.7 bill­i­on) to be raised via the ‘stability tax’ will go tow­ards pay­ing off the nati­onal debt, which could fall by some 30%.

A lea­ding Icelandic econom­ist, Lilja Móses­dótt­ir, po­ints out, however, that the announced mea­sures will not be enough to co­ver the direct cost should­ered by Icelandic taxpayers as a result of the economic crash.

Spea­ker of the Hou­se at Alþingi, Ein­ar K. Guðfinns­son, has today stressed the import­ance of cross-party soli­da­rity at this “historic junct­ure”, a view echoed by many MPs from all si­des of the Hou­se.

Kaupþing, Lands­bank­inn and Glitn­ir. Photo: Golli

Bjarni Bene­dikts­son, Mini­ster for Fin­ance and For­eign Affairs. Photo: Ómar

Árni Páll Árna­son, lea­der of the oppositi­on. Photo: Eggert