June 10, 2015 / 5:41 AM / 3 years ago

Iceland's central bank will be more active in FX market after controls lifted

STOCKHOLM (Reuters) - Once Iceland lifts capital controls, it will manage its exchange rate and be more active in the currency market than it was before the 2008 financial crisis, the governor of the country’s central bank said on Tuesday.

“We will be much more active in the market than we were prior to the crisis,” central bank Governor Mar Gudmundsson told Reuters. “But it will still be a flexible currency, so that the currency can move around based on fundamentals and the needs of the real economy.”

On Monday, major creditors of three big Icelandic banks said they had proposed a complex deal to wind up the estates of Iceland’s failed lenders. The deal will allow creditors to be paid and provide a hefty payment to the government.

If not enough creditors sign off on the proposal, they would be subject to a 39 percent “stability” tax. The deal needs to be formally approved by authorities.

Assuming the winding-up committees of the banks get a majority of creditors to back the plan, it could pave the way for Iceland to lift capital controls and rejoin the international financial community. That would give it access to cheaper finance and much-needed foreign investment.

The island nation of 330,000 is emerging from hardship following its 2008 financial meltdown, which also infuriated some European countries, who were left on the hook for billions of dollars.

Since the crisis, capital controls - to protect the Icelandic currency against a sudden plunge - have allowed the government to block payments to creditors as the assets of the old banks have been sold. But they have hampered investment and recovery from the 2008 crash.

“Hopefully, maybe next year, we have put it behind us,” Gudmundsson said.

Lifting the controls should also help economic growth, if the authorities effectively manage risks related to free capital movements, Gudmundsson said. How big that effect would be was difficult to assess, he said.

Reporting by Daniel Dickson; Editing by Larry King

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