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| Iceland to Lift Capital Controls Imposed After Financial Crisis | Iceland to Lift Capital Controls Imposed After Financial Crisis |
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| Iceland’s government laid out a plan on Monday to unwind the capital controls introduced nearly seven years ago after the country’s three main banks imploded during the global financial crisis. | Iceland’s government laid out a plan on Monday to unwind the capital controls introduced nearly seven years ago after the country’s three main banks imploded during the global financial crisis. |
| The island nation was hit particularly hard during the crisis. | The island nation was hit particularly hard during the 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. |
| The capital controls, imposed that year, were put in place to prohibit money from leaving the country and worsening the already severe crisis. They were meant to last six months; they have lasted almost seven years. | |
| The release of the capital controls will be watched carefully. | The release of the capital controls will be watched carefully. |
| Many economists, including the Nobel Prize winner Joseph Stiglitz, point to Iceland as an important case study in how to manage a crisis. Despite the spectacular crash, the economy has recovered nicely. 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. | Many economists, including the Nobel Prize winner Joseph Stiglitz, point to Iceland as an important case study in how to manage a crisis. Despite the spectacular crash, the economy has recovered nicely. 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, where there was no currency to manage. Greece is scrambling to deal with its debt problem, as it economy remains in disarray. | These results stand in stark contrast to Greece and other countries in southern Europe, where there was no currency to manage. Greece is scrambling to deal with its debt problem, as it economy remains in disarray. |
| 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. |
| The current book value of the assets of the banks’ failed estates is about 15 billion euros, of 120 percent of Iceland’s gross domestic product. About 62 percent of the assets are foreign and 38 percent are domestic. | The current book value of the assets of the banks’ failed estates is about 15 billion euros, of 120 percent of Iceland’s gross domestic product. About 62 percent of the assets are foreign and 38 percent are domestic. |
| If even a portion of that money leaves all at once, the currency would collapse and the country would be in crisis again. | If even a portion of that money leaves all at once, the currency would collapse and the country would be in crisis again. |
| So the government has proposed “taxing” the debt recovered from the failed banks that leaves the country. | So the government has proposed “taxing” the debt recovered from the failed banks that leaves the country. |
| The government has essentially given one group of foreign creditors an ultimatum: They 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 assets they are owed. Or they would face a one-off tax of 39 percent of the total assets of the failed banks. | The government has essentially given one group of foreign creditors an ultimatum: They 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 assets they are owed. Or they would face a one-off tax of 39 percent of the total assets of the failed banks. |
| Iceland is essentially asking creditors to give up 900 billion krona, or about $6.8 billion, in claims against the bank estates and Icelandic residents to avoid destabilizing the nation’s currency from an enormous outflow of assets. Afterward, those creditors will then be able to move any money recovered from their remaining claims out of Iceland. | Iceland is essentially asking creditors to give up 900 billion krona, or about $6.8 billion, in claims against the bank estates and Icelandic residents to avoid destabilizing the nation’s currency from an enormous outflow of assets. Afterward, those creditors will then be able to move any money recovered from their remaining claims out of Iceland. |
| Another group of overseas creditors, who hold about 300 krona 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 krona or euros. Icelandic officials said on Monday that 10 investors held the majority of that group of assets. | Another group of overseas creditors, who hold about 300 krona 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 krona or euros. Icelandic officials said on Monday that 10 investors held the majority of that group of assets. |
| The capital controls served an important purpose. | The capital controls served an important purpose. |
| When Kaupthing Bank, Glitnir and LBI collapsed under $85 billion of debt, insolvency proceedings began in late 2008. But the estates held such a large stock of Icelandic kroner, completing the proceedings would risk severely devaluing the currency. As a result, creditors have been waiting for years for an easing of the capital controls to recover the money they are owed. | When Kaupthing Bank, Glitnir and LBI collapsed under $85 billion of debt, insolvency proceedings began in late 2008. But the estates held such a large stock of Icelandic kroner, completing the proceedings would risk severely devaluing the currency. As a result, creditors have been waiting for years for an easing of the capital controls to recover the money they are owed. |
| But the cost of the capital controls, businesses say, has been steep. According to the Iceland’s Chamber of Commerce, from 1993 to 2008, when capital was free to come and go, export revenue generated by globally competitive firms grew about 8 percent annually. Since the implementation of capital controls, the firms’ operations have shrunk 2 percent a year. | But the cost of the capital controls, businesses say, has been steep. According to the Iceland’s Chamber of Commerce, from 1993 to 2008, when capital was free to come and go, export revenue generated by globally competitive firms grew about 8 percent annually. Since the implementation of capital controls, the firms’ operations have shrunk 2 percent a year. |
| Business leaders say the controls have been difficult to manage. “This is not how international business works anymore,” said Jón Sigurðsson, chief executive of Ossur, a company that provides prosthetics and braces. “It did 30-40 years ago. Nobody understands it.” | Business leaders say the controls have been difficult to manage. “This is not how international business works anymore,” said Jón Sigurðsson, chief executive of Ossur, a company that provides prosthetics and braces. “It did 30-40 years ago. Nobody understands it.” |