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Lifting of Capital Controls Approved

Yesterday, Icelandic MPs unanimously voted to pass a parliamentary bill regarding the lifting of capital controls. The bill was passed with 47 votes. Sixteen MPs were absent, Vísir reports.

The new law is part of the government’s plan, introduced in June last year, aimed to lift capital controls. The controls will be gradually lifted, step by step. They have been in effect since November of 2008.

Ásgeir Jónsson, assistant professor of economics at the University of Iceland, expects the easing of capital controls to lead to a higher credit rating of the Icelandic state treasury. He finds an increase in the rating likely close to the end of this year, or at the beginning of the New Year.

September 1, Moody’s upgraded Iceland’s government bond and issuer rating by two notches, from Baa2 to A3. That is Iceland’s highest rating since the banking collapse in 2008. Ásgeir attributes the increase to three factors: “First of all, it’s the stability contribution from the [failed banks’] estates. There, we’re talking about very large amounts of money, which have resulted in lowering the debts of the national treasury. Then, income to the state treasury has increased a great deal, giving the state treasury a surplus. Those two factors, lowering debt and surplus of the state treasury, push Moody’s to increase credit rating. Then, presumably, the third factor is that there is a plan for lifting capital controls.”

Central Bank of Iceland Governor Már Guðmundsson told RÚV the new law brings an enormous change. Icelandic companies can now invest directly abroad, almost unlimited, and that is important. That, he stated, was what worried him the most regarding the capital controls. “And for Icelandic homes, this means that they can acquire assets abroad, if they choose to do so, up to a certain limit.”

Már believes the national economy is well prepared for the lifting of capital controls and that the foreign currency reserves are probably larger than they’ve ever been since the end of World War II. Thus, in the unlikely event a temporary volatility must be met, we are well prepared.

Már remarked, “The economy is stable; we have a trade surplus; we have a good credit rating; the state treasury has access to foreign loan markets, as do the banks to an increasing extent.”

This was the goal, Már explained, “to prepare sufficiently, so that an unplanned capital flight wouldn’t be likely once the controls were lifted. I think everyone agrees that the likelihood of that happening is negligible.”

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