UNCLAS REYKJAVIK 000294
USDOC FOR LEAH MARKOWITZ
TREASURY FOR LAWRENCE NORTON AND ERIC MEYER
STOCKHOLM FOR FCS
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: ECON EFIN PGOV IC
SUBJECT: ICELAND: NEW FOREIGN EXCHANGE RULES EASE TRADE AND HELP
CURRENCY APPRECIATE
1.(SBU) Summary: The Icelandic Central Bank implemented new Rules on
Foreign Exchange on December 4, removing some of the restrictions
placed on access to foreign currencies in October after the collapse
of the banking sector. The new Rules generally allowed access to
currency for trade purposes but not for investment or speculation in
the krona. This limited float resulted in a quick 25 percent
appreciation of the krona. On December 16, the Rules were revised
to allow for exemptions in certain circumstances such as overseas
investment. Economists and business representatives tell us they
are not happy with the arrangement and that the currency should be
allowed to float freely. End Summary.
¶2. (SBU) Following the collapse of the banking sector in October,
the Central Bank took over all foreign exchange transactions in
Iceland. On October 15, it imposed immediate restrictions that
rationed out foreign currencies and gave priority access to currency
to importers of food, pharmaceuticals and fuel. Everyone else
literally had to get in line for foreign exchange and make a case of
need. On November 28, the Althingi (Parliament) passed new Rules on
Foreign Exchange, which modified the restrictions and confined
capital outflow. The Rules freed up access to foreign currencies
for any trade purposes, but forced Icelandic businesses to
repatriate export-generated currency and restricted access to
currency to be used for overseas investments.
¶3. (SBU) By restricting the outflow of capital, while allowing it to
flow in, the Government was able to support the value of the krona
in a partial float. The result was a quick 25 percent appreciation
over three days. The Rules also prevented foreigners involved in
the carry trade from cashing out of their krona denominated
investments in exchange for foreign currency and kept Icelandic
businesses who wanted to invest abroad in areas other than real
estate from getting access to exchange.
¶4. (U) On December 15, the Central Bank, with the Ministry of
Commerce's approval, implemented a revised set of Rules on Foreign
Exchange, which allowed for exemptions. These revisions allowed
companies with 80 percent of revenues and expenses abroad to apply
for exemptions such as permission to get access to currency for
investment or to not return export generated currency. The Central
Bank said in a press release that companies would be granted
exemptions from the Rules because of "critical interests at stake"
and because the exemptions would be unlikely to cause volatility in
the exchange rate. Still prohibited is the movement of capital from
Iceland generated by the sale of direct investments (i.e. the carry
trade).
¶5. (SBU) Director of the University of Iceland's Economic Institute
Gunnar Haraldsson thought it would have been better to let the krona
float freely. He likened the current situation to a system that was
in place 30 years ago. He noted that companies were pretty
successful in working past the restrictions at that time, and that
they would likely be able to do the same today. Haraldsson said it
is very hard to control markets and the restrictions, even with the
new modifications, are "not intelligent." Managing Director of the
Chamber of Commerce Finnur Oddsson criticized the new regulations
and doubts their usefulness. Oddsson said the new regulations will
hinder normal reconstruction of the Icelandic business sector and
will damage Iceland's reputation for a long time. Oddsson said the
modifications implemented on December 16 had little effect on the
Chamber's view of the restrictions.
VAN VOORST
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