Risk in removing Iceland’s capital controls

SedlabankiCapital controls introduced in the wake of the 2008 financial crisis are becoming increasingly difficult remove due to the swelling amount of money held offshore, says an Insurance executive.

Sigurður Viðarsson, chief executive officer of Tryggingamiðstöðin hf, said in a recent interview that this poses a risk to the equity market and puts pressure on the eventual reversal of this measure that has been in place since the banking meltdown in Iceland.

“The central bank upholds very high interest rates which drives up the amount of offshore króna owned by foreigners that want to get out of the economy. Every day the problem is getting bigger and more unmanageable”, he said.

High interest rates, as a backstop to the Icelandic Krona, contributes to the problem. The restrictions are apparently blocking more than $8 billion in offshore króna holdings being divested. This amount has been forced into other assets categories, raising fears of bubble in the equity market, said Sigriður Benediktsdóttir, head of financial stability at Seðlabanki, the central bank of Iceland.

The Central Bank has raised the benchmark rate six times since August 2011 to 6 per cent at present, in a bid to support the Króna and keep inflation in check.