Iceland moves on capital controls, to tax money outflows

[REYKJAVIK] Iceland laid out plans on Monday to directly or indirectly tax creditors that want to take assets out of the country from banks that collapsed in 2008, the first step in lifting capital controls and rejoining the international financial community.

The government proposed a 39 per cent tax that creditors would have to pay if they did not come up with "stability"conditions they all agreed to by the end of this year. These terms are in effect a form of contribution by the creditors to state coffers.

The island nation of 330,000 is emerging from hardship following its 2008 financial meltdown, which also infuriated some European countries, who were left on the hook for billions of dollars.

The majority of the state's own debt stemming from the crisis has either been repaid or will be soon. Monday's proposals deal with creditors of banks and with investors in other Icelandic assets who have had their capital frozen by the controls. "It is clear we cannot wait any longer," Prime Minister Sigmundur Gunnlaugsson said speaking through a translator at a news conference. "I believe that we are laying foundations for better living conditions, less debt, less leverage and ... better conditions for growth." The government has had to strike a balance between returning the country to international financial norms and ensuring that once capital controls are lifted money does not flow out of the country so fast the currency crashes and the economy suffers.

The finance ministry said the measures were about protecting Iceland's balance of payments rather than extracting money from creditors, who are by and large hedge funds that bought into the debt after the collapse of three key banks.

It said the measures related to 1,200 billion Icelandic crowns worth of capital: 900 billion of assets of the failed banks and foreign-denominated claims against Icelandic entities and 300 billion of foreign investment in Icelandic instruments.

The 1,200 billion crowns amounts to about US$9 billion, according to a central bank rate, although it is hard to determine a true value with so little foreign-exchange trading taking place.

Signs that creditors would not attack the proposals, despite essentially taking a large haircut on recovered debt, appeared after the largest ones put forward their own proposals for a settlement, published on the Finance Ministry home page.

Those include packages of crown-denominated promissory notes, debt issuance and purchasing of financing from the central bank, amongst other conditions. The packages would have to be accepted by a majority of other, smaller creditors and then be formalised by the Icelandic authorities. "The stability conditions solve the problem in roughly the same magnitude as the stability tax, but using a different methodology and approach," the finance ministry said in a statement.

Steinunn Gudbjartsdottir, chairman of the winding up board of one of the failed banks, Glitnir, would not comment on whether a settlement would be cheaper than paying tax but she said the board will now seek the opinions of other creditors. "We will start the work immediately, but the process takes some time since there are laws on this kind of a process. The law sets a timeframe for the notice of a meeting and such but we do expect to be able to see this through in four to six months,"she told Reuters.

The government said other investors in Icelandic assets such as government bonds could also get their money out of the country by selling crowns to the central bank. Alternatively, they could reinvest their capital in newer government debt that would be convertible out of crowns at maturity.

REUTERS