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| Iceland to Lift Capital Controls Imposed After Financial Crisis | Iceland to Lift Capital Controls Imposed After Financial Crisis |
| (about 2 hours later) | |
| REYKJAVIK, Iceland — After Iceland imposed capital controls during the global financial crisis, the move helped stabilize the country’s banking system, putting the economy on a path to recovery. | |
| As Iceland now unwinds those controls nearly seven years later, the government is trying to prevent a mass exodus of money and keep the country from backsliding. | As Iceland now unwinds those controls nearly seven years later, the government is trying to prevent a mass exodus of money and keep the country from backsliding. |
| It is a pivotal moment for a country that came to symbolize the financial crisis, after its three main banks imploded in 2008. While some economists point to Iceland as a case study of how to manage tumult, its ability to successfully lift capital controls will test that strategy. | It is a pivotal moment for a country that came to symbolize the financial crisis, after its three main banks imploded in 2008. While some economists point to Iceland as a case study of how to manage tumult, its ability to successfully lift capital controls will test that strategy. |
| Capital controls have worked for Iceland, perhaps in part because of its size. A tiny island nation with just 320,000 people, it was crushed spectacularly in the crisis but also bounced back fast. | Capital controls have worked for Iceland, perhaps in part because of its size. A tiny island nation with just 320,000 people, it was crushed spectacularly in the crisis but also bounced back fast. |
| Its economy has recovered nicely, although problems remain. Iceland is expected to grow 2.7 percent this year. Unemployment is 3.1 percent, lower than in both the European Union and the United States. | Its economy has recovered nicely, although problems remain. Iceland is expected to grow 2.7 percent this year. Unemployment is 3.1 percent, lower than in both the European Union and the United States. |
| These results stand in stark contrast to Greece and other countries in southern Europe, which use the euro and do not have their own currency to manage. As Greece still scrambles to deal with its debt problems, concerns are rising that the country will have to exit the currency union. | These results stand in stark contrast to Greece and other countries in southern Europe, which use the euro and do not have their own currency to manage. As Greece still scrambles to deal with its debt problems, concerns are rising that the country will have to exit the currency union. |
| It is rare to have capital controls imposed for such a long time. | It is rare to have capital controls imposed for such a long time. |
| In 2013, Cyprus expected to institute them for a little while, as it faced a run on its banks during the sovereign debt crisis. It just unwound them this year. | In 2013, Cyprus expected to institute them for a little while, as it faced a run on its banks during the sovereign debt crisis. It just unwound them this year. |
| In Iceland, they were meant to last six months. Instead, they have lasted almost seven years. | In Iceland, they were meant to last six months. Instead, they have lasted almost seven years. |
| “They are more adhesive than anyone expects them to be,” said Lee C. Buchheit, an adviser to the Icelandic government who works at the law firm, Cleary Gottlieb Steen & Hamilton. “They are their own self-justification.” | “They are more adhesive than anyone expects them to be,” said Lee C. Buchheit, an adviser to the Icelandic government who works at the law firm, Cleary Gottlieb Steen & Hamilton. “They are their own self-justification.” |
| Although the government is trying to ensure an orderly return to normalcy, its plan, which was laid out on Monday, is untested. | Although the government is trying to ensure an orderly return to normalcy, its plan, which was laid out on Monday, is untested. |
| The government is essentially forcing a large group of creditors to take a haircut on their holdings — either through negotiations or through a stiff tax. In doing so, they are trying to avoid destabilizing the nation’s currency from an enormous outflow of assets. | The government is essentially forcing a large group of creditors to take a haircut on their holdings — either through negotiations or through a stiff tax. In doing so, they are trying to avoid destabilizing the nation’s currency from an enormous outflow of assets. |
| Iceland was hit particularly hard during the global crisis. | Iceland was hit particularly hard during the global crisis. |
| In 2008, the country’s three main banks failed in a matter of days, sending the economy and the Icelandic krona into a downward spiral. The combined assets of the banks were in excess of $185 billion, or 14 times the size of Iceland’s economic output. The market capitalization of the stock market fell by 90 percent. | In 2008, the country’s three main banks failed in a matter of days, sending the economy and the Icelandic krona into a downward spiral. The combined assets of the banks were in excess of $185 billion, or 14 times the size of Iceland’s economic output. The market capitalization of the stock market fell by 90 percent. |
| When Kaupthing Bank, Glitnir Bank and LBI collapsed under $85 billion of debt, insolvency proceedings began in late 2008. But the creditors held such a large stock of Icelandic kronur that completing the proceedings would risk severely devaluing the currency. | When Kaupthing Bank, Glitnir Bank and LBI collapsed under $85 billion of debt, insolvency proceedings began in late 2008. But the creditors held such a large stock of Icelandic kronur that completing the proceedings would risk severely devaluing the currency. |
| The capital controls, imposed that year, were put in place to prohibit money from leaving the country and exacerbating the already severe crisis. | The capital controls, imposed that year, were put in place to prohibit money from leaving the country and exacerbating the already severe crisis. |
| While they have worked broadly, the restrictions have had painful side effects. Namely, they have deterred new investment in the country and increased the cost for companies to borrow money. | While they have worked broadly, the restrictions have had painful side effects. Namely, they have deterred new investment in the country and increased the cost for companies to borrow money. |
| From 1993 to 2008, when capital was free to come and go, exports revenues generated by globally competitive firms grew about 8 percent annually, according to Iceland’s Chamber of Commerce. Since capital controls, their operations have shrunk 2 percent per year. | From 1993 to 2008, when capital was free to come and go, exports revenues generated by globally competitive firms grew about 8 percent annually, according to Iceland’s Chamber of Commerce. Since capital controls, their operations have shrunk 2 percent per year. |
| Business leaders say the restrictions have been difficult to manage. “This is not how international business works anymore,” said Jon Sigurosson, chief executive of Ossur, a company that provides prosthetics and braces. “It did 30-40 years ago. Nobody understands it.” | Business leaders say the restrictions have been difficult to manage. “This is not how international business works anymore,” said Jon Sigurosson, chief executive of Ossur, a company that provides prosthetics and braces. “It did 30-40 years ago. Nobody understands it.” |
| Iceland has planned for some time to remove the capital controls. But it is a tricky situation. | Iceland has planned for some time to remove the capital controls. But it is a tricky situation. |
| To prevent a large capital flight, the government has given a large group of creditors an ultimatum. | To prevent a large capital flight, the government has given a large group of creditors an ultimatum. |
| Under the plan announced on Monday, creditors can either cut a deal with boards overseeing the estates of the failed banks by the end of the year and give up a portion of the money owed. Otherwise, they will face a one-off tax of 39 percent. | Under the plan announced on Monday, creditors can either cut a deal with boards overseeing the estates of the failed banks by the end of the year and give up a portion of the money owed. Otherwise, they will face a one-off tax of 39 percent. |
| Iceland is essentially asking creditors to give up 900 billion kronur, or about $6.8 billion, in claims against the bank estates and Icelandic residents. Afterward, those creditors will then be able to move any money recovered out of Iceland. | Iceland is essentially asking creditors to give up 900 billion kronur, or about $6.8 billion, in claims against the bank estates and Icelandic residents. Afterward, those creditors will then be able to move any money recovered out of Iceland. |
| Debt on those banks’ estates is largely owned by hedge funds. Current secondary market price of general claims into the banks’ estates imply a 12 percent to 31 percent recovery rate. | Debt on those banks’ estates is largely owned by hedge funds. Current secondary market price of general claims into the banks’ estates imply a 12 percent to 31 percent recovery rate. |
| Another group of overseas creditors, who hold about 300 billion kronur in short-term debt and other assets in Iceland, will have the option to participate in currency auctions or to exchange their debt for longer-term government bonds denominated in kronur or euros. Icelandic officials said on Monday that 10 professional investors held the majority of that group of assets. | Another group of overseas creditors, who hold about 300 billion kronur in short-term debt and other assets in Iceland, will have the option to participate in currency auctions or to exchange their debt for longer-term government bonds denominated in kronur or euros. Icelandic officials said on Monday that 10 professional investors held the majority of that group of assets. |
| The plan, which still has to be approved by Iceland’s parliament, is devised to allow investors to get some money out, without unsettling the broader economy. In the best case, it will also repair some of the damage to the country’s image and encourage new investment. | The plan, which still has to be approved by Iceland’s parliament, is devised to allow investors to get some money out, without unsettling the broader economy. In the best case, it will also repair some of the damage to the country’s image and encourage new investment. |
| “It is a well-thought-out and credible plan to get rid of the capital controls as quickly as possible,” said Jon Danielsson, a professor at the London School of Economics. “It puts the interests of the economy first while being fair to foreign creditors.” | “It is a well-thought-out and credible plan to get rid of the capital controls as quickly as possible,” said Jon Danielsson, a professor at the London School of Economics. “It puts the interests of the economy first while being fair to foreign creditors.” |