Newspaper article International New York Times

Iceland Looks to Lift Capital Controls Set after Crisis ; Meant to Last 6 Months, Rules on Moving Money to End after Nearly 7 Years

Newspaper article International New York Times

Iceland Looks to Lift Capital Controls Set after Crisis ; Meant to Last 6 Months, Rules on Moving Money to End after Nearly 7 Years

Article excerpt

The controls, put in place to prohibit money from leaving the country and worsening the already severe crisis, were meant to last six months but have existed nearly seven years.

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. 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 annual 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. These were meant to last six months; they have lasted almost seven years.

The release of the capital controls will be watched carefully. Many economists, including the Nobel Memorial Prize laureate Joseph E. Stiglitz, point to Iceland as an important case study in how to manage a crisis. Despite the spectacular crash, the Icelandic economy has recovered nicely. Iceland is expected to grow 2.7 percent this year. Unemployment is 3.1 percent, lower than in either the European Union or 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 its economy remains in disarray.

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 failed banks' estates is about 15 billion euros, or $16.7 billion -- 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. So the government has proposed "taxing" the debt recovered from the failed banks that leaves the country. …

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