Politicians in Iceland have announced a plan to ease of capital controls, which represents a huge step in the financial rehabilitation of the country.
Prime Minister Sigmundur Davio Gunnlaugsson, and finance minister Bjarni Benediktsson announced the move on Monday, almost 7 years after the capital controls were introduced in November 2008. The banking system in Iceland collapsed during the financial crisis, and threatened to push the island nation into financial meltdown, writes Jennifer Rankin for The Guardian.
Lifting of controls would improve relations with European neighbors
In October 2008, the three largest banks in Iceland collapsed. Glitnir, Landsbanki and Kaupthing had collected assets with a value of more than 10 times the average annual economic output of the country.
The move is designed to show that the country is moving on from the financial crisis, and improve relations with the rest of Europe. Conflict arose with the UK and the Netherlands related to bank guarantees given to British and Dutch customers of Icesave, which was part of Landsbanki.
The collapse of Landsbanki, and the realization that its guarantees were worth nothing, meant that the governments of the UK and the Netherlands were responsible for compensating savers who had lost their money, using taxpayer funds. The issue led to a 4-year legal battle, which ended when an international court ruled that Iceland was not responsible for reimbursing the British and Dutch governments.
Iceland’s fragile economic recovery could be at risk
Tourism and a strong fishing industry mean that Iceland’s economy is growing once again. A report from the International Monetary Fund stated that authorities had significantly improved financial stability, but more work was needed to better supervise banks and financial safety nets.
The Icelandic parliament voted 56-0, with one abstention, to implement a plan which analysts believe are the first step towards lifting capital controls. The plan will in fact tighten controls on certain transactions with failed banks, but the idea is to prevent citizens from finding ways around the controls before they are officially ended.
Politicians introduced the controls in order to protect the krona, but they are now causing problems. Capital controls make Iceland a less favorable destination for foreign investment, and increase the costs of borrowing, but some worry that the economic recovery could be damaged if they are lifted too soon.
It is thought that the government will manage the float of the krona, as well as imposing taxes on cash withdrawals. Officials also plan to offer investment opportunities to prevent foreign investors from rushing to take their money out of Iceland’s economy.