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Iceland Tightens Capital Controls for Failed Banks’ Creditors

March 13, 2012

Iceland’s parliament tightened capital controls for creditors of Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf in an effort to maintain krona stability as it emerges from its economic collapse.

The government introduced the bill last night and asked lawmakers to pass before markets opened today. The legislation is designed to better phase in the government’s multiyear plan to remove controls propping up the krona.

The law prevents the liquidators of the three failed banks from paying the lenders’ creditors in foreign currencies and blocks the owners of Icelandic bonds from transferring annuity and interest payments into other currencies and then transfer payments out of the country.

The bill will allow the central bank “to impose rules that would allow payments to creditors that 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 law.

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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