VZCZCXRO8764
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHRK #0294 3521728
ZNR UUUUU ZZH
P 171728Z DEC 08
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 3924
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS REYKJAVIK 000294 
 
USDOC FOR LEAH MARKOWITZ 
TREASURY FOR LAWRENCE NORTON AND ERIC MEYER 
STOCKHOLM FOR FCS 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV IC
SUBJECT:  ICELAND: NEW FOREIGN EXCHANGE RULES EASE TRADE AND HELP 
CURRENCY APPRECIATE 
 
1.(SBU) Summary: The Icelandic Central Bank implemented new Rules on 
Foreign Exchange on December 4, removing some of the restrictions 
placed on access to foreign currencies in October after the collapse 
of the banking sector.  The new Rules generally allowed access to 
currency for trade purposes but not for investment or speculation in 
the krona.  This limited float resulted in a quick 25 percent 
appreciation of the krona.  On December 16, the Rules were revised 
to allow for exemptions in certain circumstances such as overseas 
investment.  Economists and business representatives tell us they 
are not happy with the arrangement and that the currency should be 
allowed to float freely.  End Summary. 
¶2. (SBU) Following the collapse of the banking sector in October, 
the Central Bank took over all foreign exchange transactions in 
Iceland.  On October 15, it imposed immediate restrictions that 
rationed out foreign currencies and gave priority access to currency 
to importers of food, pharmaceuticals and fuel.  Everyone else 
literally had to get in line for foreign exchange and make a case of 
need.  On November 28, the Althingi (Parliament) passed new Rules on 
Foreign Exchange, which modified the restrictions and confined 
capital outflow.  The Rules freed up access to foreign currencies 
for any trade purposes, but forced Icelandic businesses to 
repatriate export-generated currency and restricted access to 
currency to be used for overseas investments. 
 
¶3. (SBU) By restricting the outflow of capital, while allowing it to 
flow in, the Government was able to support the value of the krona 
in a partial float.  The result was a quick 25 percent appreciation 
over three days.  The Rules also prevented foreigners involved in 
the carry trade from cashing out of their krona denominated 
investments in exchange for foreign currency and kept Icelandic 
businesses who wanted to invest abroad in areas other than real 
estate from getting access to exchange. 
 
¶4. (U) On December 15, the Central Bank, with the Ministry of 
Commerce's approval, implemented a revised set of Rules on Foreign 
Exchange, which allowed for exemptions.  These revisions allowed 
companies with 80 percent of revenues and expenses abroad to apply 
for exemptions such as permission to get access to currency for 
investment or to not return export generated currency.  The Central 
Bank said in a press release that companies would be granted 
exemptions from the Rules because of "critical interests at stake" 
and because the exemptions would be unlikely to cause volatility in 
the exchange rate.  Still prohibited is the movement of capital from 
Iceland generated by the sale of direct investments (i.e. the carry 
trade). 
 
¶5. (SBU) Director of the University of Iceland's Economic Institute 
Gunnar Haraldsson thought it would have been better to let the krona 
float freely.  He likened the current situation to a system that was 
in place 30 years ago.  He noted that companies were pretty 
successful in working past the restrictions at that time, and that 
they would likely be able to do the same today.  Haraldsson said it 
is very hard to control markets and the restrictions, even with the 
new modifications, are "not intelligent."   Managing Director of the 
Chamber of Commerce Finnur Oddsson criticized the new regulations 
and doubts their usefulness.  Oddsson said the new regulations will 
hinder normal reconstruction of the Icelandic business sector and 
will damage Iceland's reputation for a long time.  Oddsson said the 
modifications implemented on December 16 had little effect on the 
Chamber's view of the restrictions. 
 
VAN VOORST