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Iceland to Tighten Capital Controls for Failed Banks’ Creditors

March 12, 2012

Iceland’s government has introduced a bill in parliament aimed at tightening the island’s capital controls for creditors of Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf as part of a bid to maintain currency stability.

The government asked the legislature to approve the bill this evening. The proposed legislation would restrict capital movements permitted until now in order to reduce the chances damaging the government’s plan to remove controls over the krona.

If approved, the law will prevent the liquidators of Kaupthing, Glitnir and Landsbanki from paying the banks’ creditors in foreign currencies and will bar owners of Icelandic bonds from transferring annuity and interest payments into foreign currencies, which can then be transferred out of the country.

“Instead of the authorizations that the winding-up committees of the failed banks now have according to law, the central bank would impose rules that would allow payments to creditors which conform with stability,” according to the bill posted on the Reykjavik-based parliament’s website. “In addition to preventing the possible instability in the foreign- exchange market, the changes to the foreign-exchange act proposed in the bill will level the position of parties in regards to the capital controls and prevent unnatural profits” gained by circumventing the laws.

Iceland was forced to introduce capital controls and seek a $4.6 billion bailout from the International Monetary Fund in 2008 after its biggest banks defaulted on $85 billion in debt, sending the krona plunging as much as 80 percent against the euro and driving the economy into a recession. The country ended a 33-month program with the IMF in August.

Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based Organization for Economic Cooperation and Development estimates.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik

To contact the editor responsible for this story: Jonas Bergman at

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