Bloomberg News

Iceland Deploys Krona Exit Tax to Temper Capital Liberalization

November 27, 2011

Nov. 25 (Bloomberg) -- Iceland will probably force krona investors held in limbo by capital controls since 2008 to pay a fee if they choose to exit their holdings without using a central bank program, the government said.

“The strategy really speaks for itself,” Finance Minister Steingrimur J. Sigfusson said in an interview in Reykjavik. The plan “allows for an exit tax to be implemented.”

Iceland’s central bank last week presented the next stage in its capital liberalization program, designed to absorb the exchange rate shock of foreigners offloading their kronur by channeling the currency into long-term investments. Krona investors who don’t use the central bank’s program to repatriate their holdings will probably face the exit fee, central bank Governor Mar Gudmundsson said on Nov. 18.

“This is yet another way for the central bank to tie investors in or make them pay,” Jon Bjarki Bentsson, an economist at Islandsbanki hf in Reykjavik, said by phone.

Investors using the central bank’s program will tie up their kronur for five years. In exchange, they will “never face any exit fee,” Gudmundsson said last week. “The exit fee is a fee which will be payable by the owners of offshore kronur who won’t enter into this program. At some point in the future, this will be implemented.”

Iceland, whose banks defaulted on $85 billion in 2008, is moving into the final stages of its recovery plan as the last vestiges of crisis management are gradually removed. The island’s decision, taken together with the International Monetary Fund, to impose capital controls three years ago was key to surviving the bleakest moments of the crisis and helped prevent an all-out run on the island’s assets, Gudmundsson said in an interview last week.

Rates Converging

The central bank may hold currency auctions within a few weeks to absorb offshore kronur, Gudmundsson said. Once the first phase of easing controls is over, a second phase targeting onshore kronur will commence, the bank said. That will start once the offshore and onshore krona rates converge, it said.

Offshore kronur trade at about 250 to the euro, according to Reykjavik-based brokerage HF Verdbref. The onshore rate was 159.75 yesterday. There are about $3.6 billion in kronur held by foreigners, according to central bank data.

“The central bank hasn’t fully designed this program, but it’s meant to make sure that the offshore rate and onshore rate of the krona converge,” Bentsson said. “The central bank is hoping that the difference between those two rates will be slim. So the longer investors hold on to their kronur assets, the closer they will get to being able to exchange their holdings using the onshore exchange rate.”

Iceland has yet to decide the details of how it will charge an exit tax, Sigfusson said. The specifics “will be explained further” when “those steps are implemented,” he said.

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Omar Valdimarsson in London at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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