Hope springs eternalIT WAS one of the worst-hit casualties of the financial crisis 0f 2007-08, but Iceland this week took steps that symbolised its recovery. The last remaining controls on capital outflows were lifted, allowing pension and investment funds to invest their money abroad. And the central bank struck another deal with offshore holders of frozen krona-denominated assets—buying more of them back at a discount.
The country’s crisis experience was a cautionary tale of an over-exuberant financial sector. Three of its banks, with assets worth 14 times GDP, keeled over within a week; the krona fell by 70% on a trade-weighted basis in a year; Iceland was the first rich country since Britain in 1976 to need an IMF rescue.
To stem capital outflows and further falls in the krona, the government in 2008 slapped restrictions on money leaving the country. The measures also froze offshore holdings of krona-denominated assets, which at the time amounted to 40% of GDP. Even the IMF, usually in favour of more orthodox free-market policies, supported the move. The country nonetheless experienced a severe recession,…Continue reading