Iceland's last capital controls may be gone by year-end

LONDON (Reuters) - Iceland’s remaining capital controls should be ended by the end of the year, a top finance official said, dovetailing with a potentially radical overhaul of monetary policy that may include a peg.

The country’s recovery from its crippling 2008 banking crisis was confirmed this year when it relaxed most of the restrictions that had been preventing its population, businesses and investors from moving money abroad.

But the government kept a small restriction in place as a precaution, mainly affecting U.S. investment funds.

Having seen its currency soar and coaxed some of the funds with cash-for-bonds swaps, the final controls are not seen lasting long.

“The remainder (of the money restricted by the capital controls) is something we have to deal with,” Gudrun Thorleifsdottir, director general of Iceland’s ministry of finance and economic affairs, told Reuters.

“It will be necessary to alter the law to release, so to speak, the rest. But most likely the government will announce something about this later this year.”

Around $2 billion of foreign money had been frozen as result of the capital controls, most of which belonged to four U.S.-based funds -- Autonomy Capital, Eaton Vance, Loomis Sayles and Discovery Capital Management.

At least two of those funds, Autonomy and Eaton Vance, have just taken up a cash-for-bonds swap offer from the central bank, and others have until mid-June to accept the same deal.

The offer is at a crown-to-euro exchange rate that is well below the current open market rate and Loomis Sayles has said that it at least won’t sign up until it gets the live rate.

It may, and if it does the current rate would effectively give it over 15 percent more than the other funds got when they accepted their deal a couple of months ago.

“Nothing has been decided,” Thorleifsdottir said. “But it is obvious that if the value of the remaining assets is very low it is harder to argue that releasing them would create instability.”


There may be radical changes coming around the same time.

Iceland has set up a group of experts to look at options for a complete overhaul of the way it runs monetary policy. The most dramatic of those would be pegging the crown to the euro or the pound to prevent a sharp rise and fall wreaking havoc on the economy further down the line.

Finance Minister Benedikt Johannesson, who belongs to a junior party in the country’s coalition government, has said the status quo is not sustainable. But it won’t be just his decision.

“This is a big issue that needs a broad political support,” Thorleifsdottir said. “To be clear, no decision on pegging has been made, but he (Johannesson) is a very sensible guy and I think he would support the most beneficial solution for the Icelandic Economy.”

On top of that Reykjavik is also looking at starting a sovereign wealth fund which could use some of the profits from the country’s geothermal-driven power firm and some of currency reserves stockpiled by the central bank.

In another attempt to cool its currency and improve its finances it is also planning to hike value added tax next year on the booming tourist sector -- on everything from hotels to volcano or whale watching tours.

“There are concerns about the recent appreciation of our currency,” Thorleifsdottir said. “The main cause of the appreciation is favorable external conditions: tourism is booming and currently the inflow of capital is much more than the outflow.”

Reporting by Marc Jones; editing by Jeremy Gaunt