Reykjavík Grapevine - 21.09.2012, Blaðsíða 12

12
The Reykjavík Grapevine
Issue 15 — 2012
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involving technology and freedom
of speech. However, Vodafone
spokesperson Hrannar Pétursson
wrote to the Grapevine shortly after
the story was printed and said that
if the company went forward, the
idea is that the “filter,” while put in
place by default, would be com-
pletely on the user end and could
be easily turned off.
Parliament opened, and this year a temporary security
fence was erected around the front
of the parliamentary building. This
measure was likely
put in place
after last year’s
parliamen-
tary opening
resulted in Left
Green MP Árni
Þór Sigurðsson
getting decked in the head with an
egg. However, there was little to
fear, as very few protesters showed
up for the opening events and
the fence was taken down shortly
thereafter.
They say that crime doesn’t pay, but whoever said
that likely meant “any crime but
insider trading.” Former Perma-
nent Secretary of the Ministry of
Finance Baldur Guðlaugsson—who
was found guilty of insider trading
and is currently serving
a two-year prison
sentence—now
has at least two
jobs while behind
bars. He is one
of the owners of
Almenna bókafé-
lagið (“the Public Book
Society”), which will be working
in close contact with the newly
established libertarian “think tank”
Research Centre for Innovation and
Growth (RNH). And he has also
more recently been hired by the
law offices of Lex, where a lawyer
spoke glowingly of Baldur’s experi-
ence and how it will contribute to
the firm. What sort of “experience”
an inside trader could bring that
would be beneficial to a law office
was not mentioned.
— Continued —
Did you know you have to support a valid flight ticket if you want to pur-
chase some dollars at a local bank? Does that weird you out?
NEWS IN BRIEF
NEWS IN ICELAND
EARLY SEPTEMBER
Iceland | The Economy
If Icelanders wants to buy currency,
say US dollars, they can only pur-
chase $2,800 USD, and they must
prove to their bank that they are
travelling to another country. Ice-
landers have been operating under
this reality for the last four years,
when capital controls were put in
place to protect the value of Ice-
land’s currency.

With the removal of those capital con-
trols set to take place 2013, Icelanders
may soon have an easier time buying
foreign currency. At the same time,
there is much concern over how this
will affect Iceland’s economic recovery.
Uh oh, the glacier bonds
To refresh your memory, capital con-
trols were established in late 2008 af-
ter the króna plunged as much as 80%
against the euro. The controls blocked
an estimated $8 billion in assets from
leaving the economy.
The main reason given for estab-
lishing capital controls at that time was
that without strict controls, there was a
risk that the owners of ‘Jöklabréf’ (“gla-
cier bonds”), equivalent to 50% of GDP,
would rush to unload their holdings
thereby making the Icelandic króna
plunge even further than the 50% de-
preciation from the króna’s peak to bot-
tom.
“Glacier bonds were issued for $300
billion ISK,” says Dr. Sigríður Bene-
diktsdóttir, director of the financial sta-
bility department at the Central Bank
of Iceland. “To put it simply, there’s a
John Smith in Canada holding a bond
in ISK, payable in ISK, as it has a higher
interest rate than his local bond mar-
ket. The crisis hit in 2008 and to pay
out that bond and simultaneously all of
them within a few days, it would have
resulted in a steep devaluation of the
currency, which wouldn’t have been
very good. This is the reason we had to
resort to capital controls and this is the
overhang we’re working with now.”
To reduce the future risk of a cur-
rency collapse, the Central Bank of
Iceland has submitted proposals for
relaxing capital controls in stages, in an
effort to remove the controls as soon as
possible without risking economic sta-
bility.
“The main thing we’re trying to do is
prevent what happened before the fi-
nancial collapse,” Sigríður says. “Many
things that we’re proposing have been
in effect in other countries.”
Why should you care? This is an essen-
tial step in Iceland’s financial recovery.
Cutting off life support
In a 2011 Central Bank report, it was
stated that before the capital con-
trols would be lifted for Icelandic resi-
dents, it would be necessary to adopt
rules designed to protect the financial
system against the risk that could ac-
company unrestricted capital flows,
including liquidity risk in the financial
institutions’ balance sheets. Iceland
would also have to address the risk
entailed in foreign currency lending to
residents without income in the bor-
rowed currencies.
The time has come for proposals.
“The first rule deals with liquidity
issues,” Sigríður says. “Before the col-
lapse we would only look at short-term
inflows and outflows and we didn’t care
if the outflows were in foreign currency.
That was a problem.”
The proposed rules “should limit
foreign exchange risk in the financial
system, as well as limiting foreign cur-
rency liquidity risk; furthermore, they
will, in combination, limit the banks’
potential for excessive growth.”
Another proposal in the Central
Bank’s report concerns limiting depos-
its from abroad. “The issue, deposits
from abroad, came to half of our GDP,”
Sigríður says. “The regulator couldn’t
stop the deposits. It’s the way that
governance is. It takes time. We want
to limit it, but the aim of this is to not
to punish foreign deposit holders. In
fact, what we’re trying to achieve is to
discourage foreigners from putting de-
posits in our banks.”
Sigríður is optimistic about lifting
the restriction: “Some are bullish, and
I tend to be,” she says. “To the extent
that the economy has 2–3% growth,
we have about 5% unemployment, and
strong exporting and tourism, I think
lifting capital controls will be positive.”
When will the Central Bank’s
changes be enacted? The timeline for
the proposals is complicated. “This is a
political decision,” she says. “As of now,
the rules for capital controls expire at
the end of 2013, but we also have elec-
tions in April next year and their out-
come may affect the liberalisation pro-
cess.”
Will the króna make it?
Meanwhile, others are less optimistic,
and talk of adopting an alternative cur-
rency continues.
Þórólfur Matthíasson, an economics
professor at the University of Iceland,
told the New York Times in July: “The
capital controls are worse and worse
for companies, but the fear is that if we
lift them, the value of the króna will col-
lapse.” Þórólfur says the solution would
be for Iceland to join a larger, more
stable currency, such as the euro.
A Central Bank report on Iceland’s
currency and exchange rate published
on September 17, noted that there
could be positive outcomes if the euro
is adopted including increased interna-
tional trade.
Still, it’s not so straightforward. Már
Guðmundsson, governor of the Central
Bank, said at a press conference, “The
unilateral adoption of another currency
would have significant risks associ-
ated with them.” He went on to say that
joining the Eurozone would depend on
the debt crisis in Europe, which is in its
third year.
What Will Lifting Capital Controls Mean
For Iceland’s Recovery? It’s complicated
Words
Jenna Gottlieb
Illustration
Grapevine
“
The unilateral adoption
of another currency would
have significant risks as-
sociated with them.„
The rate of ISK against USD, August 21, 2006 -September 19, 2012