Reykjavík Grapevine - 19.06.2015, Blaðsíða 8

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8 The Reykjavík GrapevineIssue 8 — 2015
OPEN 7-21
BREAKFAST,
LUNCH & DINNER
T EMPL AR A SUND 3 , 101 RE Y K JAV ÍK , T EL : 5711822, W W W.BERGSSON. IS
By Gabríel Benjamin
NEWS
IN
BRIEF
Continues Over...
While the Akureyri town
council is busy setting up a one-day
women-only council, and Reykjavík
city council is putting on a series of
events to celebrate the centennial
anniversary of women’s suffrage, the
national government decided to put
an end to the ongoing nurses’ wage
dispute by banning their strike
actions.
Predictably, nurses have re-
sponded by resigning en masse,
with a whole shift of ICU nurses giv-
ing notice. Puzzlingly, our prime min-
ister wasn’t at Parliament to discuss
the controversial bill—instead he and
our finance minister were spotted
watching a game of football.
In their defence, it was a pretty
spectacular game, where Iceland
beat the Czech Republic 2-1
in the 2016 UEFA qualifier. If the
men’s team continues doing as well in
their four upcoming matches, they’ll
get to compete in next year’s UEFA
championship in France, which
would be their first time in the actual
competition. Iceland’s women’s team
qualified and competed last in 2011.
As fascinating as football may be, it
hasn’t distracted MPs from proposing
a formal investigation into PM
Sigmundur Davíð Gunnlaugs-
son’s ties to purchase of a local
paper. Following the arrest of two
sisters who purportedly threatened
to blackmail the PM with sensitive
information about his role in funding
Politics | Bright?Economy | Capital controls
In November 2008, the government instated capital con-
trols to prevent the country’s currency from tanking af-
ter the banking collapse. Seven years later, a plan to lift
the controls has been announced. As there has been some
confusion surrounding the news, here are some key facts
on the controls and the plan to lift them.
Words by Sigrún Davíðsdóttir
Illustration by Lóa Hjálmtýsdóttir
The ABCs Of The Capital Controls
Why the controls, and what’s the plan?
Iceland introduced capital controls on
November 29, seven weeks after the of-
ficial date of the financial collapse, Octo-
ber 6, 2008. The reason for the controls is
the following: in the years leading up to
the collapse, foreign investors had taken
advantage of the high interest rates be-
ing offered in Iceland, buying Icelandic
Treasury bills and other sovereign prod-
ucts, nicknamed “Glacier bonds.”
When the crisis hit, investors were
busy converting their króna assets (ISK)
into foreign currency (FX), thereby rap-
idly draining the country’s none-too
large foreign currency reserves. At the
time, these holdings amounted to 625
billion ISK, 44% of GDP. When a country
does not have enough FX to convert the
domestic currency that wants to leave it
is called a “balance-of-payment” prob-
lem (in case you want to impress your
friends with economist-speak, it’s even
better if you just say BoP).
Over time, this original overhang
of foreign-owned ISK, the funds that
called for the capital controls in 2008,
has gone from 44% of the country’s GDP
to 16% of the GDP. The Central Bank of
Iceland (CBI) has reduced these hold-
ings by auctions. Earlier this year, the
CBI announced further measures, the
last of which were announced in the
plan for lifting the capital controls, in-
troduced on June 8.
The controls are on CAPITAL,
meaning that capital for investment can-
not be moved in or out of the country.
This means that Iceland no longer ad-
heres to the four freedoms of European
Economic Area (EEA): the freedom on
goods, services, people and capital.
However, the controls are NOT on
goods and services. Thus, both com-
panies and private individuals can buy
foreign goods and services. So while it’s
possible to buy vintage Nike trainers on
Ebay or the services of a foreign archi-
tect to spruce up your 101 flat, it’s not
possible to buy shares in Apple or a flat
in Mallorca as a second home until the
controls are lifted.
With time, another pool of foreign-
owned ISK has built up in addition to the
original overhang. This addition is ISK
in the estates of the three failed banks:
Kaupthing, Glitnir and Landsbanki.
Since foreign creditors hold approxi-
mately 95% of the claims to these three
estates, the ISK assets of the estates have
now formed this second pool of foreign-
owned ISK, now approximately 25% of
GDP. These two pools of foreign-owned
ISK hold the controls in place.
The classic way to solve this kind of
a problem (Iceland certainly is not the
first country to face this problem) would
be to negotiate with creditors a so-called
haircut. This does not mean that the
creditors will be forced to have their hair
cut at an Icelandic hair salon (although
that might help the local economy): in
finance-speak “haircut” means “writing
down” assets. In the Icelandic context
this means that the creditors accept that
there is not enough FX in Iceland for
them to convert all their ISK and take it
out of the country (remember, the BoP
problem) so they agree that they cannot
get all the ISK assets in the estates. This
“haircut” comes as no surprise to the
creditors: they had been hoping for it, but
also hoping to negotiate the terms. Until
now, the Icelandic government has not
been willing to discuss the terms with
the creditors, claiming it was none of its
business how the estates settled with its
creditors. Even now that the plan has
been announced, the government still
claims they did not “negotiate,” but only
had “conversations” with the creditors.
No matter the wording, the creditors
so far seem content with the new plan,
that is, the outcome of the non-negotia-
tions.
One reason why it has taken more
than two years to come up with a plan
is that before the last elections, in 2013,
the Progressive Party had promised that
when the estates would pay out their
creditors it would “unavoidably” bring a
windfall of billions—the highest number
mentioned was 800 billion ISK, now ap-
proximately 40% of Icelandic GDP. Late
last year, however, Prime Minister Sig-
mundur Davíð Gunnlaugsson stopped
mentioning this coming windfall. It was
not until talk of fleecing the creditors
and the great funds “unavoidably” being
there up for grabs that the government
acted.
Now that the plan is in place, and
with the largest creditors agreeing to it,
there are voices in Iceland asking why
Iceland could negotiate so effortlessly
when Greece and Argentina are locked
in furious disputes with their creditors.
The short answer is that the Icelandic
capital controls are a BoP problem, NOT
a sovereign debt problem, as in Argen-
tina and Greece. The Icelandic state does
not owe the creditors money: it just has
to find a way for the creditors to take
their money out of the country without
Continues on P.10
REPORT