Iceland and capital controls: check the politics not just the economics

To continue with the Eurozone analogy: the (at first hidden, later more overt) agenda of all action taken by the EU was to prevent any bank in the Eurozone failing. It was deemed to be bad for the reputation of the young currency area and in the Realpolitik it counted that the strong German and French governments were adamant in sheltering their own banks from unwise lending to the debt-ridden periphery. Both these agendas were politically driven and those who understood the political dominance over sound economic thinking got their predictions right: no euro-exit, good public money thrown in to reward bad lending.

In Iceland, there might also be an agenda, other than just abolishing the capital controls without jeopardising financial stability: the Progressive Party and its leader, prime minister Sigmundur Davíð Gunnlaugsson has time and again, since the election campaign early last year and after it came to power, stated that there will unavoidably be money for the state coffers when the bank estates will be dealt with in order to abolish the controls (see more on facts and figures in an earlier Icelog).

The Independence Party, led by minister of finance Bjarni Benediktsson, has appeared to be less focused on abolition as a way to enrich Iceland. Recently though he has faintly echoed Gunnlaugsson’s view that doing it quickly, via bankruptcy rather than the more long-term composition the creditors are keen on, might be a sensible way. It is not clear though if he really believes it or is just putting pressure on the creditors.

It seems increasingly clear that the abolition of the capital controls, which needs an action plan on dealing with the foreign-owned ISK assets of the estates, might well be more dependant on political solutions than purely finding a way to secure financial stability. Both parties will want as much of the credit for a plan to abolish the controls – but the Progressive party seems also keen to create a situation where it will be seen as having won over the foreign creditors. The Progressive narrative is that it secured an Icelandic victory in the Icesave case (though the Icesave problems are alive and kicking in the unsolved Landsbanki bonds) – and now it is going to secure a victory over other foreigners, the creditors.

The necessary solutions will be conjured up in the tense political sphere between the two parties.

*Continue reading at The Icelog.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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