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The Icelandic Financial Crisis pp 209–249Cite as

Palgrave Macmillan

The Faustian Bargain of Capital Controls

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Abstract

Monday, January 3, 1994, marked a turning point in Iceland’s economic history. This was the first business day on which the nation conducted affairs under the auspices of the European Economic Area (EEA) Agreement.

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Notes

  1. 1.

    See chapter 2 of: Ásgeir Jónsson. (2009). Why Iceland?: How One of the World’s Smallest Countries Became the Meltdown’s Biggest Casualty. McGraw Hill Professional.

  2. 2.

    Björgvinsson, Sigurður Tómas. (1994, January 4). Endurmat á framtíð sem fortíð. (A reassessment of the future and the past). Alþýðublaðið.

  3. 3.

    See data on the CBI website: http://www.cb.is/statistics/statistics/2016/06/23/Miscellaneous-credit-undertakings/?stdID=12

  4. 4.

    International Monetary Fund. (2005, October). Iceland: Selected Issues. (IMF Country Report No. 05/366).

  5. 5.

    Kaminsky, Graciela L. and Carmen M. Reinhart (1999). The Twin Crises: The Causes of Banking and Balance of Payments Problems. American Economic Review, 89(3), 473–500.

  6. 6.

    Redburn, Tom. (1992, September 17). But Don’t Rush Out to Buy Kronor: Sweden’s 500 % Gamble. The New York Times. http://www.nytimes.com/1992/09/17/news/17iht-perc.html

  7. 7.

    Heikensten, Lars. (1998, July 15). Financial Crisis – Experiences from Sweden. Seminar organized by the Swedish Embassy in Korea. http://www.riksbank.se/sv/Press-och-publicerat/Tal/1998/Financial-Crisis----Experiences-from-Sweden/

  8. 8.

    Dawson, Thomas C. (2002, June 13). Stiglitz, the IMF and Globalization. A speech to the MIT Club of Washington. https://www.imf.org/external/np/speeches/2002/061302.htm

  9. 9.

    Honkaphohja, Seppo. (2009). The 1990’s financial crises in Nordic countries. Bank of Finland Research Discussion Papers. 5. http://www.riksbank.se/Upload/Dokument_riksbank/Kat_foa/2009/6_8nov/Honkapohja.pdf

  10. 10.

    Central Bank of Iceland. (2008, November 28). New foreign exchange regulation. (Press release No. 44/2008). http://www.cb.is/publications-news-and-speeches/news-and-speeches/news/2008/11/28/New-foreign-exchange-regulation-/

  11. 11.

    See the Letter of Intent from the Icelandic authorities to the IMF, which was published as an attachment to the IMF Staff Report in November 2008.

  12. 12.

    International Monetary Fund. (2012, November 14). The Liberalization and Management of Capital Flows: An Institutional View. The following is stated on page 25: “In crisis situations, or when a crisis may be imminent, there could be a temporary role for the introduction of CFMs [Capital Flow Management Measures] on outflows.”

  13. 13.

    Prime Minister’s Office. (2011, August 26). Iceland completes IMF Programme. https://eng.forsaetisraduneyti.is/news-and-articles/nr/6864

  14. 14.

    See, for example: Paul Krugman. (2010, June 30). The Icelandic Post-Crisis Miracle. New York Times http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/?_r=0

  15. 15.

    With a judgment on December 14, 2011, the EFTA Court concluded that the capital controls were compatible with the EEA Agreement, as both EU member states and EFTA states could adopt protective measures in the event of balance of payments problems. EFTA Court Case E-3/11.

  16. 16.

    Central Bank of Iceland. (2009, October 31). First stage of capital account liberalisation. (Press release No. 33/2009). http://www.cb.is/publications/news/news/2009/10/31/First-stage-of-capital-account-liberalisation-/

  17. 17.

    Reykjanes District Court verdict no. S-180/2013.

  18. 18.

    Ægisson, Hörður. (2012, May 24). Hátt reitt til höggs en eftirtekjurnar gætu orðið rýrar. (Serious allegations but the results could be scarce.). Morgunblaðið. http://www.mbl.is/greinasafn/grein/1423113/

  19. 19.

    Reykjanes District Court verdict no. S-180/2013.

  20. 20.

    Reykjanes District Court verdict no. S-180/2013. (2014, December 18). https://domstolar.is/default.aspx?pageid=347c3bb1-8926-11e5-80c6-005056bc6a40&id=448c87e1-4930-4a90-8dc4-e15d4260ea7e

  21. 21.

    The Central Bank of Iceland. (2010, November 1). Rules on Foreign Exchange. (Press release no. 29/2010). http://www.cb.is/publications/news/news/2010/11/01/Rules-on-Foreign-Exchange/

  22. 22.

    Act no. 17/2012, March 13, 2012.

  23. 23.

    Central Bank of Iceland. (2012, March 27). Gjaldeyriseftirlit Seðlabanka Íslands framkvæmir húsleitir. (The Central Bank’s Capital Control Surveillance Unit conducts raids.) (Press release no. 13/2012).

  24. 24.

    Central Bank of Iceland. (2015, September 6). Til upplýsingar vegna frétta af niðurfellingu máls embættis sérstaks saksóknara gegn Samherja. (Information regarding news of the suspension of the Special Prosecutor’s case against Samherji.)

  25. 25.

    It is important not to confuse an exit tax with foreign exchange market transaction charges. The latter are usually associated with Nobel laureate James Tobin (1918–2002), and called Tobin taxes. Tobin taxes are intended to prevent short-term arbitrage in the foreign exchange market; i.e., to prevent speculators from making large-scale round-trip trades in the market, thereby creating instability. Such taxes have long been under discussion and have been admired by many observers since Tobin first introduced his idea in 1972, in connection with the end of the Bretton Woods system. But they have never been implemented, as introducing Tobin taxes would probably be impossible unless all of the countries in the world should commit to taxing foreign exchange transactions. For further information, see: Tobin, J. (1978). A proposal for international monetary reform. Eastern Economic Journal, 4(3), pp. 153–159.

    Eichengreen, B., Tobin, J., & Wyplosz, C. (1995). Two cases for sand in the wheels of international finance. The Economic Journal, 105 (Jan.), pp. 162–172.

  26. 26.

    Central Bank of Iceland. (2011, March 25). Áætlun um losun gjaldeyrishafta. (A plan for lifting capital controls.) Report to the minister of economics and business.

  27. 27.

    This discussion is based on the following sources:

    Abdelal, R., & Alfaro, L. (2003). Capital and control: lessons from Malaysia. Challenge, 46(4), 36–53. Doraisami, A. (2004). From crisis to recovery: the motivations for and effects of Malaysian capital controls. Journal of International Development, 16(2), 241–254.

  28. 28.

    Foong, K. K. (2008). Managing capital flows: the case of Malaysia (No. 93). ADB Institute Discussion Papers.

    Kawai, M., & Takagi, S. (2003). “Rethinking capital controls: the Malaysian experience”. Macroeconomics Working Papers, 473. Kochhar, K. (ed.). (1999). Malaysia, selected issues (No. 98–114). International Monetary Fund.

  29. 29.

    Act no. 17/2012, March 13, 2012.

  30. 30.

    Ægisson, Hörður. (2012, October 27). Seðlabankinn studdi ekki breytingar. (The Central Bank did not support changes.) Morgunblaðið.

  31. 31.

    There are three reasons for this. One, a foreign buyer could flip the asset, buy it at a low price and sell quickly for a higher price, hence adding to the balance of payments problem. Second, the new banks were overcapitalized, so a new buyer could have stripped the new bank and paid out extraordinary dividends or used other means to get cash out of the asset, which then could be converted into FX. Third, the ISK exposure could be hedged as capital controls were liberalized. Such a hedge would affect the FX market.

  32. 32.

    Glitnir. (2012, November 9). Announcement from the Winding Up Board of Glitnir hf.

    Kaupthing. (2012, November 13). Further update on targeted launch of composition.

  33. 33.

    Júlíusson, Þórður Snær (2013, February 23). Kröfuhafar stofna krónuhóp. (Creditors form an ISK group.) Fréttablaðið.

  34. 34.

    Ægisson, Hörður (2013, August 22). Fái ekki arð í 20 ár. (No dividends for 20 years). Morgunblaðið.

  35. 35.

    Segir slitastjórnir þurfa að vera raunsæjar. (Says the winding-up boards have to be realistic.) (2014, January 23). Viðskiptablaðið.

  36. 36.

    Act no. 155/2010 on special taxes on financial institutions.

  37. 37.

    Spink, Chris (2014, January 14). Iceland cold-shouldered as crisis countries rebound. Reuters.

  38. 38.

    Ægisson, Hörður (2014, February 5). 300 milljarða reiðufé fast í höftum. (300 billion in cash stuck behind controls.) Morgunblaðið.

  39. 39.

    Lastra, Rosa and Buchheit, Lee (Eds.). (2014). Sovereign Debt Management. Oxford: Oxford University Press.

  40. 40.

    Central Bank of Iceland. (2011, March 25). Áætlun um losun gjaldeyrishafta. (A plan for lifting capital controls.) Report to the minister of economics and business.

  41. 41.

    Greiði gjald fyrir forgang (Pay a Fee for Priority) (2014, November 18). Morgunblaðið, p. 1.

  42. 42.

    Younker, Kyle. (2015, March 10). Glitnir, Kaupthing, Landsbanki bondholders vent qualms as Icelandic bank saga plods on. Debtwire.

  43. 43.

    The bonds were issued under Rule 144A of the Securities Act.

  44. 44.

    Younker, Kyle. (2015, March 10). Glitnir, Kaupthing, Landsbanki bondholders vent qualms as Icelandic bank saga plods on. Debtwire.

  45. 45.

    Macro-Prudential Stability Levy. (2010, December 20). Joint press release from the Financial Services Commission and Financial Supervisory Service. South Korea.

  46. 46.

    Bruno, Valentina and Shin, Huyn Song. (2014). Assessing Macroprudential Policies: Case of South Korea. Scandinavian Journal of Economics, 116(1), 128–157.

  47. 47.

    Turner, Grant. (2011, December). Depositor Protection in Australia. Reserve Bank of Australia Bulletin.

  48. 48.

    Eurogroup. (2013, March 16). Eurogroup Statement on Cyprus.

  49. 49.

    Campbell, Andrew, and Paula Moffat. (2013). Protecting Bank Depositors after Cyprus.

  50. 50.

    Barry Eichengreen. (1989, September). The Capital Levy in Theory and Practice. NBER Working Paper Series, no. 3096,

  51. 51.

    For further information, see: Rabkin, Franny. (2015, March 4). Exist charges on taking money out of SA ‘not a tax’. Business Day. http://www.bdlive.co.za/business/2015/03/04/exit-charges-on-taking-money-out-of-sa-not-a-tax

  52. 52.

    See also pp. 153–155 in. Feldman, Gerald D. & Seibel, Wolfgang. (2004, December). Networks of Nazi Persecution: Bureaucracy, Business and the Organization of the Holocaust.

  53. 53.

    For further discussion of the Canadian departure tax, see Emigration from Canada: Tax Implications. (2014, November). Manulife. https://repsourcepublic.manulife.com/wps/wcm/connect/5cb1c800433c4450b901ff319e0f5575/ins_tepg_taxtopicemigrtn.pdf?MOD=AJPERES

  54. 54.

    For further information, see the website of the Internal Revenue Service: http://www.irs.gov/Individuals/International-Taxpayers/Expatriation-Tax

  55. 55.

    Ægisson, Hörður (2015, April 17). Fundað með vogunarsjóðum í London. (Meetings with hedge funds in London). DV.

  56. 56.

    Financial Supervisory Authority (2015, June 8). Aðgerðaáætlun til losunar fjármagnshafta. (Action plan for lifting capital controls.)

  57. 57.

    Act no. 60/2015 on Stability Levy. http://www.althingi.is/altext/144/s/1400.html

  58. 58.

    Central Bank of Iceland. (2015, June 8). Announcement concerning capital account liberalization measures. (Press release No. 13/2015). http://www.cb.is/library/Skraarsafn---EN/Capital-control-liberalisation/Press%20release%20no%2013%202015%20Announcement%20concerning%20capital%20account%20liberalisation%20measures.pdf

  59. 59.

    Central Bank of Iceland. (2015, October 28). Seðlabanki Íslands hefur lokið mati sínu á fyrirliggjandi drögum að nauðasamningum. (The Central Bank has concluded its assessment of composition agreement drafts.)

  60. 60.

    Glitnir. (2015, November 20). Results of the Voting at the OCM on 20 November 2015.

  61. 61.

    LBI hf. (2015, November 23). Outcome of voting on the Composition Proposal of LBI hf.

  62. 62.

    Kaupthing. (2015, November 24). Composition Voting Meeting 24 November 2015 – Composition Proposal approved.

  63. 63.

    Glitnir (2015, December 5). Glitnir’s Proposed Composition; LBI hf. (2015, December 18). Composition confirmed by the District Court; Kaupthing (2015, December 15). Composition confirmed by the District Court.

  64. 64.

    Glitnir (2015, December 16). Exemption granted by the Central Bank of Iceland; Kaupthing (2016, January 15). Kaupthing Composition – Exemption granted by the Central Bank of Iceland; LBI hf. (2016, January 11). Exemption from Capital Controls – final settlement of priority claims.

  65. 65.

    Glitnir. (2016, January 8). Completion of the Composition – Issue of New Notes and New Ordinary Shares; LBI hf. (2016, March 23.) Status and fulfilment of the Composition Agreement; LBI hf. (2016, March 23.) Status and fulfilment of the Composition Agreement.

  66. 66.

    Ægisson, Hörður (2015, September 29). Kröfuhafar geta ekki farið í mál við íslensk stjórnvöld. (Creditors cannot sue Icelandic authorities.) DV.

  67. 67.

    Ministry of Finance. (2015). Capital Account Liberalization. http://www.ministryoffinance.is/media/frettatengt2015/Capital-Account-Liberalisation.pdf

  68. 68.

    Central Bank of Iceland. (2015, October 27). Settlement of the failed financial institutions on the basis of stability conditions: Impact on balance of payments and financial stability. http://sedlabanki.is/library/Skraarsafn/Gjaldeyrismal/AssessmentOfPreliminaryCompositionProposals.pdf

  69. 69.

    Ministry of Finance. (2015, June 8). Capital Account Liberalization. http://www.ministryoffinance.is/media/frettatengt2015/Capital-Account-Liberalisation.pdf

  70. 70.

    Central Bank of Iceland (2015, October 27). Settlement of the failed financial institutions on the basis of stability conditions.

  71. 71.

    Government Debt Management. (2016, March). Markaðsupplýsingar. (Market information). 17(3). http://www.lanamal.is/GetAsset.ashx?id=8484

  72. 72.

    InDefence. Umsögn og ábendingar um frumvarp til laga um stöðugleikaskatt, 786. mál og frumvarp til laga um fjármálafyrirtæki (nauðasamningar), 787. mál.

  73. 73.

    Moody’s Investor Service. (2009, June 29). Rating Action: Moody’s upgrades Iceland’s sovereign ratings to Baa2; outlook stable. Standard & Poor’s Rating Services. (2015, July 17). Iceland Ratings Raised to ‘BBB/A-2’ On Proposals Toward Lifting Capital Controls; Outlook Stable. FitchRatings. (2015, July 24). Fitch Upgrades Iceland to ‘BBB+’; Outlook Stable.

  74. 74.

    Central Bank of Iceland (2015, October 27). Uppgjör fallinna fjármálafyrirtækja á grundvelli stöðugleikaskilyrða: áhrif á greiðslujöfnuð og fjármálastöðugleika Samkvæmt fyrirliggjandi drögum að nauðasamningum Glitnis hf., Kaupþings hf. og LBI hf.

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  1. University of Iceland, Reykjavik, Iceland

    Ásgeir Jónsson & Hersir Sigurgeirsson

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Jónsson, Á., Sigurgeirsson, H. (2016). The Faustian Bargain of Capital Controls. In: The Icelandic Financial Crisis. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-39455-2_7

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