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Foreign Exchange

FX: Iceland close to ending capital controls

Iceland may remove, as early as the first quarter of 2018, the last of its capital restrictions imposed in the wake of its financial crisis, say market players.

Iceland-krona-coin-fish-ice-R-600

The country has already scrapped most of its capital controls this year, and the currency has steadily appreciated against the euro since.

Gisli Hauksson, co-founder and chief executive of Gamma Capital Management in Reykjavík, says: “The króna's performance this year has definitely come as a surprise to a lot of people, given the rationale for having the capital controls in the first place was actually to keep the currency from falling.”

The remaining restrictions are designed to prevent speculative trading in the króna. It was heavily traded in the years immediately before the financial crisis. Huge króna-denominated eurobond issuance, offering an attractive interest rate versus the euro, led Iceland’s currency to swell to an unsustainable size relative to the country’s economy. But trading collapsed when Iceland found itself at the centre of the storm in 2008, with its three biggest banks falling, leading to the implementation of capital controls.

As Iceland gradually reopened its economy, it implemented a capital flow management tool last year. This forced foreign investors in króna-denominated assets to hold 40% of the value of their investment in a non-interest generating account for a year.

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