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March 15, 2017

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Iceland ends over 8 years of capital curbs

ICELAND lifted its remaining capital curbs yesterday, ending more than eight years of controls on businesses and citizens put in place after its banks collapsed during the financial crisis.

Icelandic lenders buckled under the weight of huge debts amassed over years of overseas expansion, spreading instability through other European nations and making the country a symbol of the excesses that helped to trigger the financial crash.

The government started dismantling capital controls last year by easing curbs for local residents in a nation of only around 330,000 people. The end of the last controls, first announced on Sunday, came into force at midnight.

Iceland hopes the move will open the way for investment by Icelandic pension funds abroad and lift prospects for foreign investment in the country.

A small and volatile currency has exacerbated Iceland’s economic troubles and will need to be carefully managed.

The Icelandic crown remains at historically strong levels but posted its biggest one-day decline in eight years on Monday as the end of controls was expected to trigger initial outflows of pent-up foreign and domestic money.

The currency weakened yesterday, dropping about 1 percent against both the dollar and the euro. Iceland’s central bank declined to comment on the currency movements ahead of its interest rate decision today.

Sedlabanki kept its key deposit rate flat at 5 percent in February, but with capital controls lifted, Finance Minister Benedikt Johannesson hoped interest rates could be cut. “I have no idea what they will do, but at least we are trying to create the conditions for them to make it easier to reduce the interest rate,” he said yesterday.

Authorities have been preparing for the scrapping of restrictions, with the central bank amassing 815 billion Icelandic crowns (US$7.4 billion) of currency reserves at the end of last year to ease the transition.

“We have a foreign currency reserve much bigger than we have ever had before,” Johannesson said in a telephone interview. “That of course makes it easier to stabilize the currency rate.”


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