Iceland Scales Back Capital Controls

Effective today, Iceland lifted restrictions on capital outflows. New investors can now exchange their holdings for foreign currencies, provided the transactions are duly registered.

Capital controls were imposed late last year following the collapse of Iceland's largest banks. The krona has been unable to keep pace with the euro's recovery since March. It has lost more than 15% against the euro since April 1. Iceland has been dependent on a $4.6 bln package from the IMF. The IMF had withheld payment until now until creditor claims were resolved. Last week, the IMF released about $167.5 mln according to reports, the first tranche this year. The Icelandic government indicates those funds will be used to bolster reserves.

Further unwinding of the capital controls are unlikely to be imminent, but could take place over the next several quarters, if the economic and financial environment is conducive.

The major rating agencies appear to want to wait until the next IMF review to review their ratings. S&P and Fitch rate Iceland long-term foreign exchange debt as BBB-, with negative outlooks. This is one step above junk, while Moody's is a bit more optimistic with a Baa1 rating, three steps above junk.

The euro hit a peak of ISK187.76 early last December. The euro slipped to almost ISK140 by late March and has been grinding higher since. Earlier today the euro made a new high for the year against ISK, moving above the 185 level. However, the gains were not sustained and a break of ISK184 now warns of a move back toward ISK180.