Other than reports about sporadic eruptions by volcanos with unpronounceable names, you don’t hear much about Iceland in the news media.
But the Land of Fire and Ice is now finally melting away its last remaining capital controls and restoring a warmer climate of financial normality to entice international investors back from the cold and into its sizzling banking institutions, and that’s big news in the global business world.
Iceland, which went into shock mode after its largest banks went belly-up in 2008, has spent the last nine years devaluating its currency and imposing draconian controls on capital.
But last month, Iceland once again put up the open-for-business shingle.
And while the Atlantic island nation’s government shared the decade-long pain of its financial bust with investors by freezing payments to foreign corporations and transferring its domestic clients’ assets to strictly regulated nationalized successor banks during its slow recovery process, the old adage of “once burned, twice shy” hasn’t kept international capital from flowing into Iceland as a result of the new loosed controls.
Even though Icelandic authorities have been at loggerheads with domestic and overseas corporations over frozen assets amounting to more than $1 billion since the emergency measures were first introduced, investors are by no means shying away from the high-yield financial opportunities the country’s banks still offer.
In fact, money has been flooding into Iceland in unprecedented amounts ever since Reykjavik first started dismantling fiscal controls in 2016 by easing restrictions for national investors.
With the help of the International Monetary Fund (IMF), Iceland has now totally rebuilt and redesigned its financial and fiscal systems.
Iceland’s central bank amassed more than $7 billion in currency reserves last year (the largest figure in the nation’s history), and the economy grew by a whopping 11.3 percent in the last quarter of 2016.
Iceland ended the year with more foreign investments inside its borders than Icelandic investments abroad (with a net surplus of about 1.1 percent of Gross Domestic Product, compared with a deficit of more than 700 percent in 2009), and the country’s GDP is expected to grow by a vigorous 3.8 percent in 2017.
Outside entrepreneurs are practically beating down Iceland’s doors to cash in on big-return interest rates in what has been deemed one of the best-performing economies in the developed world.
(Currently, the seven-day term deposit rate in Iceland is at 5 percent, compared to the eurozone’s short-term repo rate of zero.)
And now Reykjavik is throwing in an extra carrot to sweeten the pot.
In order to facilitate the lifting of capital controls, Iceland’s central bank has agreed to purchase offshore assets amounting to nearly 90 billion Icelandic crowns at an exchange rate of 137.5 kronas per euro.
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Still, Iceland needs to be careful not to fall back into its former trap of letting its economy heat up so quickly that it has no other option than to cool down and once again go into financial hibernation.
Its bustling export- and tourism-based economic recovery is already showing signs of overheating.
This could lead to a replay of Iceland’s devastating 2008 crisis, with unsustainable inputs of capital producing a repeat of the boom-to-bust phenomenon.
And nobody wants to see Iceland back in the financial deepfreeze.
Thérèse Margolis can be reached at therese.margolis@gmail.com.