The Icelandic government adopted a revised strategy for gradual liberalisation of capital controls in a cabinet meeting yesterday. The strategy was developed by the Central Bank of Iceland in cooperation with the Ministry of Economic Affairs, Ministry of Finance and the Financial Supervisory Authority. Furthermore, consultations were carried out with the International Monetary Fund and advice sought from an external expert with experience in managing and lifting capital controls.
The strategy is in two main phases. The first phase focuses on releasing so-called offshore krona, which are largely held by foreign residents in bank deposits and government securities. These offshore krona are estimated at over ISK 400-500 bn. or around 25% of Iceland‘s annual GDP. Their existence has undermined confidence and distorted prices in key financial markets. It is for this reason that the first phase aims at substantially reducing offshore krona holdings. When sufficient progress has been made to this end, and other conditions have been met, the second phase, focusing on onshore krona can begin.
The strategy does not include a timeline. The pace of its execution will depend on the evolution of relevant economic conditions and on the outcome of previous steps in liberalization. The overall approach aims to minimize possible negative effects on currency stability, bank liquidity and the bond market. Numerous small steps will therefore be taken as conditions permit.
In the first stage, offshore krona will be addressed through series of currency auctions. Initially, the Central Bank of Iceland will auction foreign currency to owners of offshore krona. These offshore krona will then be offered in auctions to owners of foreign currency who will be required to invest them either in long-term government bonds or in Icelandic enterprises for a set period of time. Current owners of legally obtained offshore krona will also be able to channel them into investments in Icelandic enterprises, subject to similar requirements. Those who wish to invest in domestic enterprises will be allowed to match their foreign currency investment with an equal amount of offshore krona. In time, holders of offshore krona who have neither sold them in the auctions nor invested them in Icelandic enterprises will be allowed to either swap their offshore krona into a long-term foreign currency government bond or pay an exit levy.
The second phase of the strategy will be carried out after adequate progress has been made in reducing offshore krona holdings, the offshore exchange rate has converged sufficiently with the onshore rate and other economic preconditions have been met. Iceland’s future monetary policy framework will also have to be in place. The decision on the beginning and implementation of the second phase will be made by the government in cooperation with the Central Bank of Iceland.
Normalisation of Icelandic capital markets remains a priority for the authorities. To secure the liberalisation of the capital controls without threatening financial stability, the Minister of Economic Affairs will propose to the Icelandic parliament, Althingi, an extension of the temporary provision authorising capital controls until year-end 2015. However, the government may lift the controls at an earlier date if conditions permit.
(Press release)
More on this (including facts of actual onshore and offshore krona rate here :
https://www.icenews.is/index.php/2011/03/27/icelandic-krona-exchange-rates-reflect-recovery-of-national-economy/
https://www.icenews.is/index.php/2011/05/17/iceland-receives-mixed-news-from-credit-ratings-agencies/
“So onshore is 162 and offshore is, what, 240? (It was back in Dec, apparently.) So 170-200 sounds closer to the truth.”
I don’t think its as simple as that, you can’t average it out. There would be a constant downward pressure with selling which would probably go on for a long time and could end up the same as the offshore rate or even less. Longer term the balance of payments should bring it back up.
>Get rid of currency controls ! You will see very quickly converencge of so called offshore with onshore Krona rate between EUR 130 and EUR 180.
Seems unlikely, surely? The onshore rate is currently 162 and removing the controls is not going to drop that.
So onshore is 162 and offshore is, what, 240? (It was back in Dec, apparently.) So 170-200 sounds closer to the truth.
>” However, the government may lift the controls at an earlier date if conditions permit. ”
Yes it won’t be this Red-Green coalition that lifts it — because they don’t have until end of 2011 in office, let alone 2015.
As said before, this reasons for not liberallizing exchange control is stupidity.
There is more impact on Krona from Icelandic people spending on they credit cards abroad than in payments of glacier bonds this days.
It is ludicracy that this controls are still there this year. Yes people who invest will want to see result of IceSave III referendum but there is plenty who is interested in investing in Iceland for reasons I and others have said many times over last two years.
Get rid of currency controls ! You will see very quickly converencge of so called offshore with onshore Krona rate between EUR 130 and EUR 180.
The longer this controls stay the more distrotions of all kinds is happening. And the more people will find ways to get around restrictions and thus leading to more controls and nonsense from burecrats and hiring of people to enforce this instead of being employed in say Invest In Iceland or companies house of Iceland helping inward investors and Icelanders that do want to start they own business.
Remove currency controls politican Idiots !!
A little more on it here:
http://uti.is/2011/03/capital-restrictions-until-2015/