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Iceland central bank sees move towards lifting capital controls soon

[COPENHAGEN] Iceland's central bank will make a "significant" move towards lifting capital controls soon, although a final settlement on how foreign creditors of collapsed banks get repaid is yet to be found, its governor told Reuters on Friday.

Iceland imposed capital controls in 2008 after a financial meltdown following the collapse of three major banks that brought the north Atlantic island to the brink of bankruptcy.

A rapid privatisation of Icelandic banks led to a massive inflow of foreign capital and expansion of their lending - assets upon the failure of the banks amounted to more than ten times the gross domestic product of the country.

Now, after billions of euros' worth in foreign capital has languished in Iceland for six years, both the government and the central bank have made moves to lift controls.

Central Bank Governor Mar Gudmundsson noted that through small and regular currency auctions the central bank had managed to reduce the currency overhang - foreigners' money stuck in Iceland - to 15 per cent of GDP now from 40 percent in 2008. "But 15 per cent is still a significant number and it would be very imprudent if we were just to assume that these 15 percent were stable," he said from Reykjavik by telephone.

The solution was two-fold - to reduce that overhang further and to induce foreign money to stay in Iceland with attractive investment opportunities. "We will shortly be offering investors alternatives ... and these alternatives are such that they will greatly reduce the likelihood of instability when controls are lifted," Mr Gudmundsson said, adding an announcement will be made in a "few weeks or very few months." Many investors had expected progress last year, however. The delay appears to be tied to another problem from the crisis that needs to be unravelled - the settlement of debts to foreign creditors of the collapsed banks - which has become much more politically charged.

While Finance Minister Bjarni Benediktsson appears willing to solve the issue quickly and hired sovereign debt lawyer Lee Buchheit to coordinate talks with creditors, Prime Minister Sigmundur Gunnlaugsson has emphasised the harm investors had done to Icelanders, signalling that they should pay.

All parties agree controls cannot be lifted before agreement is reached with banks' creditors. But a recent suggestion of a large exit tax on foreign money leaving Iceland, and the finance minister's insistence that there were no such plans, highlights the political hurdles such an agreement must still clear. "These conflicting views seem to hinder the government in proceeding on lifting the controls," said Sigrun Davidsdottir, a London-based Icelandic journalist who has an extensive blog on the crisis and its aftermath.