Iceland lifts final yoke from crippling 2008 crisis

Jeremie RICHARD with Hugues HONORE in Stockholm

Thriving economically on the back of a tourism boom, Iceland on Tuesday ended the capital controls set up to stabilise its economy after the devastating 2008 financial crisis, lifting a heavy yoke.

On Sunday, the government announced it was terminating the restrictions that prevented investors and the public from taking their money out of Iceland while authorities shored up the national currency, the krona.

Imposed after the dramatic collapse of the country's inflated banking system, the capital controls served their purpose: after a deep recession, the country made a spectacular economic recovery, returning to growth in 2011 and making up for lost ground with strict budget and wage austerity.

"Removing the capital controls is mostly a good thing," noted University of Iceland economics professor Thorolfur Matthiasson.

In practice, the end of the restrictions means that Icelanders -- everyone from the general public to entrepreneurs and pension funds -- as of Tuesday no longer have to seek permission from the central bank to buy or sell currency.

They can themselves accept investors' money, and choose to invest abroad.

However, some safeguards remain for the financial sector. Banks and institutions wanting to trade the Icelandic currency must have a foot in the Icelandic financial system and must have a minimum amount of funds in Iceland via the so-called minimum reserve requirement, the finance ministry said.

Iceland has learned its lesson from the financial sector's costly shenanigans of the early 2000s. Back then, the freely traded krona was the darling of speculators betting on the gap between interest rates in Iceland and the rest of the world, otherwise known as "carry traders".

At the time Iceland registered movements of capital far exceeding the small size of its economy.

- Long history of crises -

"We are not going back to (the) pre-crisis situation as there will be some measures left to reduce the scope for carry traders and speculative activity," Matthiasson noted.

Putting the brakes on speculation is a no-brainer for Icelanders.

They are keen to avoid a repeat of the 2008 crisis, when the value of their currency plunged, which for many meant that the cost of their mortgages -- made out in euros or Swiss francs -- skyrocketed to unimaginable heights.

At the same time, Britain invoked anti-terrorism legislation to freeze Icelandic assets on its territory, because of a dispute over the reimbursement of British account holders in the collapsed online bank Icesave.

The North Atlantic island has a long history of financial crises, having registered "more than 20" since 1875, according to a study conducted by four central bank economists published in 2015. "Serious" crises have erupted "every 15 years on average".

And history appears to repeat itself: the economy, which is dependent on just a handful of sectors -- once upon a time it was fisheries, then finance, now tourism -- has time and again sped through the boom-and-bust cycle.

So what is next for the country that registered growth of 7.2 percent in 2016, according to preliminary figures, as wages rise in step and real estate projects flourish everywhere?

According to the centre-right government, there is nothing to worry about this time around.

With (Other OTC: WWTH - news) a krona that has been steadily rising in recent months -- bad news for wary tourists -- Prime Minister Bjarni Benediktsson said Sunday that lifting capital controls ought to counter the increase, at least in the short term.

And he was right: on Monday, the krona registered its biggest fall in one day since the crisis.

To address the problem long-term, the government has set up a commission to examine the country's monetary future.

For years experts have questioned whether Iceland should hold onto such a small and vulnerable currency as the krona, although discussions about adopting the euro or the Canadian dollar have never gone very far.

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