The article talks about Iceland finally relinquishing the heavy capital controls that were placed in the aftermath of the 2007-08 financial crisis. The three banks Kaupthing, Landsbanki and Glitnir who had assets worth 14 times the GDP were at the core of the crisis. Since then Iceland had enacted restrictions on capital outflows and froze all offshore krona-denominated assets (40% of the GDP) to avoid any outwards money flow. The krona had fallen by 70% and their GDP fell by 10% during those years, and they had to apply for an IMF loan.
Now, Iceland is doing significantly better after the heavy restrictions placed in the years before. Their recent growth rate stands at 7.2%. The problem, however, is that they have a very high domestic interest rate at 5% which is deterring foreign investments in the country. And that combined with the block on capital outflow led to high inflation in the domestic markets.
The restrictions on capital outflow made sense at the time of the meltdown since it was meant to prevent issues with foreign banks arising in the near future, and the high domestic interest rates were placed to further keep investment in the domestic realms. But given that their situation is much better now, it might be time for Iceland to liberate the economy a little, but a little precaution is clearly not bad.
1 comment:
Yeah maybe it will be wise for them to be a little more liberal. I do understand their reservation, however, the US may be too liberalized in that regard, even in spite the damage of 2008 financial crisis. While I think the US economies low monetary policy restrictions help for more rapid increase in the GDP and more innovation, I think the deep recessions we have had illuminate a need for a shift in our system. This will improve the longterm health of our economy.
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