Sigrún Davíðsdóttir's Icelog

Capital controls: common sense or panic politics?

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Icelanders have been drip-fed with promises of an almost-there plan to lift capital controls, so far nothing but the question is if this plan is now about to be introduced. A plan will most likely need to be supported by a new Bill, on much-mentioned tax, either exit tax or recently mentioned stability tax, which means it should first be presented to the government, which would mean either any Tue. or Fri., the two days the government holds its regular meetings.

However, this government does not always follow the normal route, remains to be seen if a plan will emerge at all, how it will be presented and, most of all, what it will contain.

There is indeed still a plan in place, from 2011, as I have pointed out before but what is needed is i.a. how to deal with ISK assets in the estates of the failed banks. A tax on the estates will not solve the underlying issue of the foreign-owned ISK, which are holding the controls in place. But it will fulfill promises made by prime minister Sigmundur Davíð Gunnlaugsson, at least if it will not end in legal wrangling in various jurisdictions and hinder the easing of the controls.

As I have often outlined earlier, it seems that Gunnlaugsson and minister of finance Bjarni Benediktsson have not been looking into the same direction for a solution: Gunnlaugsson has underlined the moral necessity of the banks paying for the harm caused and that there would, unavoidably, be a windfall for the state; Benediktsson has stressed the need for an orderly process that should take as little time as possible and not incur a legal risk.

Given that the prime minister’s party now hovers at 8% in the opinion polls, after harvesting 25% in the elections two years ago the question is whether he will be prone to panic politics, i.e. instigating a conflict with creditors he would try to orchestrate as a victory. After all, he has very little to lose – the party can hardly sink further. It is always a dangerous situation when politicians have little to lose and much to gain. Close to him is ex-PM and ex-governor of the CBI Davíð Oddsson, who is adamant that his legacy especially of his time at the CBI is without a blemish. Oddsson has often shown that he prefers a hard line against creditors, no matter what.

As I have said time and again (after all, most things have been said regarding the capital controls, now it is just waiting to see what there is to come…) Benediktsson’s leadership will be seriously tested by the big Plan to-come. Although leading the same party Oddsson led, the Independence Party, Benediktsson seems further from Oddsson on these issues than the PM. If Gunnlaugsson’s – and Oddsson’s – view prevails it means that Benediktsson is literally powerless in this government. After all, capital controls are his remit, not the PM’s and he would lose all credibility as a leader in his sphere.

The topic of capital controls is muddled in the debate. Very few seem to remember that the problem, which holds them in place is foreign-owned ISK, the old over-hang (now much reduced and already being worked on by the CBI; further steps awaited) and the ISK in the estates of the old banks. Any action that does not solve this problem is no solution at all. Taxing the estates clearly does not solve the problem – after all, this is not a problem of debt but of currency shortage, not enough to convert the foreign-owned ISK. Iceland does not lack funds but funds – the estates are failed private companies, unconnected to the state – and the easiest way would be a haircut of some sort.

The effect for Iceland of a plan will not only be on the economy but very much a political effect. If Benediktsson loses this battle his party – or at least the more sensible part of it – must ask itself if the Independence party is only in government to promote policies of the coalition party. Certainly a role, which would have been unthinkable in earlier times, for example at the time Oddsson was the party leader and PM.

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Written by Sigrún Davídsdóttir

June 3rd, 2015 at 4:26 pm

Posted in Uncategorised

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