STOCKHOLM – Iceland should be able to loosen its still-tight capital controls within six months following a court ruling that left the financial sector on safer ground, the International Monetary Fund (IMF) said yesterday.
“The conditions have been falling into place for another step towards capital control liberalisation,” Mark Flanagan, the IMF mission chief to Iceland said. “The binding constraint right now is financial system stability.”
Iceland’s top court ruled last month banks should use domestic interest rates when calculating charges on foreign currency loans, easing worries that a new wave of losses would hit the country’s shattered banking sector.
Mr Flanagan said the ruling removed much uncertainty hanging over the financial system. Although banks’ balance sheets needed further restructuring, it set the stage for an easing of the capital controls put in place to prop up the currency.
“Overall, I think there are reasonable prospects for a step to be taken . . . within six months.”
Capital controls were imposed after Iceland’s three biggest banks collapsed during the global financial crisis in 2008 to prevent foreign investors from selling more local currency bonds and exacerbating a fall in the Icelandic crown.
The country has since kept the bulk of its capital account flows closed, but has allowed investors to move proceeds from investments overseas and has eased restrictions on trade flows.
Iceland won approval late last month for further loans from the IMF under an international programme, opening the way for funding from its Nordic neighbours and Poland. It was forced to seek billions of dollars of aid as its banks faltered two years ago under a mountain of debt built up during years of aggressive overseas expansion.– (Reuters)