After markets closed May 20, minister of finance Bjarni Benediktsson introduced a new Bill (text in English) on offshore ISK, now amounting to ISK319bn, around 14% of Icelandic GDP.
As expected, offshore ISK owners are will be offered to participate in an auction. Those who don’t accept the offer will see their funds put into so-called “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.”
The restrictions are special indeed: the debt instrument will only carry interest of 0.5%, to be reviewed every year. In addition, this debt instrument does not have a specified maturity. As interest rates in Iceland are well above 0.5% and not likely to be near this rate any time soon, the offer is to participate in an auction or have the funds locked in at negative interest rates forever and a day, i.e. well below market rates in Iceland.
If the word “expropriation” comes to mind the 4.1 Chapter is on “Provisions of the Constitution and the European Human Rights Convention”:
The recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination. Failure to adhere to these principles could create liability for compensatory damages on the basis of Article 72, Paragraph 1 of the Constitution, cf. also the protection of ownership rights according to the European Human Rights Convention, or could constitute illegal discrimination, which would be in violation of the non-discrimination rule contained in Article 65 of the Constitution, cf. also the prohibition of discrimination on the basis of subjective considerations, according to the European Human Rights Convention and the EEA Agreement.
It is clear that the beneficial owners of offshore króna assets are residents and non-residents and that disposal of offshore króna assets has been subject to restrictions ever since the capital controls were imposed. The extraordinary circumstances currently prevailing are considered to justify the transfer of offshore króna assets in the form of electronically registered securities to administrative accounts with the Central Bank of Iceland and the transfer of deposit balances to accounts that will be subject to the special restrictions provided for in the bill of legislation. The same principles lie behind the recommendation that payments due to other offshore króna assets be subjected to comparable restrictions.
It is appropriate to emphasise that the bill of legislation does not represent a transfer of ownership rights. Furthermore, changes in the custody of króna-denominated assets are not conducive to eroding their value, with reference to the fact that the authorisations for disposal will be either unchanged or more liberal. Nevertheless, it can be said that, by stipulating changes in administration of custody, owners’ right of disposal are being restricted as regards the selection of an administrator.
The Central Bank is authorised to charge administrative fees on offshore króna assets, but these fees shall not exceed the Bank’s actual incurred expense. The restrictions in the bill of legislation centre mainly on owners’ right to decide where their assets are held in custody.
The restrictions provided for in the bill are an element in the vital task of reducing the risk attached to the aforementioned offshore króna assets. The conditions prevailing at the time this bill of legislation is presented – i.e., the imposition of capital controls following the financial crisis in autumn 2008, the steps taken since then, and the damage that protracted capital controls do to the domestic economy – are discussed in detail in Section 2. Furthermore, reference is made to the discussion in that section concerning the necessary scope of the measures provided for in the bill of legislation.
The continued restrictions on the right to dispose of offshore króna assets are based on vital public interest considerations. These restrictions are a necessary element of measures to release the pressure that offshore króna assets could put on the exchange rate of the Icelandic króna, other things being equal, and they are also a way to give the owners of the assets the option of releasing them without jeopardising exchange rate stability. The objective of the bill is to enable the liberalisation of capital controls on households and businesses in Iceland, and also on owners of offshore króna assets. (Emphasis mine).
The situation of the Icelandic economy can be debated but it is, for the time being, fairly if not extraordinary good.
The above mentioned “continued restrictions” indicate that as capital controls are lifted on others, those who hold offshore ISK but didn’t want to participate in the auction are effectively kept locked in.
As soon as plan to lift capital controls was announced in June last year, carry trades on the ISK rose. Intriguingly, part of the present locked-in offshore ISK stems from carry trades (actually often long-term investment rather than only hot inflows). This means, that even before the old overhang has been released, new inflows have started – either a sign of the market’s extremely short memory or faith in the Icelandic economy.
The government carefully avoided legal wrangling with creditors of the estates of the fallen banks. The question is if the new Bill does the same trick and leads to a satisfactory outcome for all. The above are points likely to cause consternation among the four largest holders of offshore ISK, all institutional investors. The question is if it’s more important for them to find a solution and finally clarify the situation or if they see the new measures as an infringement on their legal rights.
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