Iceland advised to drop bank creditor programme

Iceland advised to drop bank creditor programme

Iceland must take a stronger stance on world creditors as its failed banks aim to safeguard the failed króna in a planned exit from a six-year capital controls regime, said a World Bank economic adviser.

Washington-based Icelandic economic adviser for the World Bank, Friðrik Jónsson, said the priority since the beginning appears to have been about how Iceland can bail out offshore króna holders. He added, however, that he was not sure the country even cares about them.

The North Atlantic nation imposed capital controls back in 2008 to safeguard the króna after the collapse of its three biggest banks: Landsbanki, Kaupthing and Glitnir. Despite winning crucial battles as it resurrects the economy, including regaining a Fitch Ratings investment grade, Iceland has still to unravel its economy, which is worth $16bn, from $7.2bn-worth of offshore krona locked behind currency restrictions.

Friðrik Jónsson explained that the balance of payment and the capital controls was a major weight on the economy, advising that Iceland would be better to “refocus its priorities” in terms of removing capital controls.

The economic adviser said the country could create a new currency, like Germany did with the Deutsche Mark in 1948, with multiple exchange rates that could help reduce money supply and “clean up the economy”.

He pointed out that a second option would be forcing the three failed banks into bankruptcy and exchanging the currency for their foreign assets, although he said there would be a “litigation risk” from the failed banks’ creditors should they adopt this method.

He suggested that a third option could be to hand over the failed banks’ foreign assets and fully tax their króna assets. He explained that if Iceland chose this option it would have to make sure the króna received from the transaction did not get into circulation and preferably be completely written off to prevent “overheating and inflation”.

Spokesman for the central bank, Stefán Stefánsson, said he would be giving no comment at this time.