A decade later, Iceland sets sights on final post-crisis exit

[REYKJAVIK] Iceland's government is about to say goodbye to a decade of post-crisis emergency measures by opening up for the sale of its remaining stakes in the country's banks and by loosening the shackles on foreign investors still trapped in the north Atlantic economy.

Ten years after the collapse of Iceland's banking sector, the result of a speculative bubble that burst in the wake of the global financial crisis, the government is due Monday to publish a white paper on the future structure of the financial system.

The paper is expected to contain language designed to facilitate the sale of stakes still owned by the state in Islandsbanki hf and Landsbankinn hf, both reincarnations of previously failed banks.

"The state is greatly diminishing the banks' value with strict fees and requirements, so a loosening of both would be wise," said Asgeir Jonsson, an associate professor at the University of Iceland.

The government has already reduced its share in Arion Banki hf, which went public in June, but still has stakes worth the equivalent to 15 per cent of the country's economy in the two lenders. Those stakes are to be sold as soon as circumstances are "favorable," the government has said.

Offshore Trap

The ruling coalition of Prime Minister Katrin Jakobsdottir on Friday also submitted a bill to parliament that would allow the remaining owners of offshore kronur still trapped in Iceland to close their positions in full by exchanging them for foreign currency in the onshore market.

The bill also gives them the option of holding them as "unrestricted onshore krona assets in cases involving continuous ownership from the time before the capital controls were imposed," the Finance Ministry said in a statement.

Many of the investors that sought to take advantage of the carry trade 10 years ago ended up being trapped by capital controls. While most of them were able to recover some of their money by taking part in a foreign exchange auction, others didn't.

Eaton Vance and Autonomy Capital were among those who refused to take part in the auction and later launched legal proceedings to recoup their money.

When the controls were first introduced, offshore kronur assets amounted to 15 per cent of gross domestic product. They now amount to 3.1 per cent of GDP, according to the central bank.

The government's latest moves come just weeks after the central bank lowered a special reserve requirement ratio to 20 per cent from 40 per cent. The ratio sets how much foreign investors interested in purchasing Icelandic bonds are forced to place in a zero per cent account for a year.

"All the right conditions are in place to lift the last remains of the capital controls in Iceland," said Stefan Gudjonsson, an economist at Arion. While the proposed legislation will not result in the full lifting of capital controls, the legislation "will hopefully mark an end to the dreaded offshore krona situation," Mr Gudjonsson said.

BLOOMBERG