Derivatives traders targeted in Iceland currency experiment

Balancing act...

Carry Trade

The central bank has tried to protect the krona from a sell-off as controls are gradually scaled back by raising interest rates. Iceland’s benchmark rate is 6 percent, compared with 0.5 percent in the euro zone. That’s spurring demand for the currency and will make it a target for carry trades, said Sigurdur Vidarsson, chief executive officer of Tryggingamidstodin hf, the island’s latest company to go public.

“Every day the problem is getting bigger and more unmanageable,” Vidarsson said in an interview. Yet he worries that private investors “might take all their savings out of the economy as soon as they get the chance.”

Central bank Governor Mar Gudmundsson said today Iceland may need to consider a different strategy in phasing out its controls after measures to date proved inadequate. The bank has discussed the option of imposing an exit tax with the Finance Ministry, he said.

‘Considerable Pressure’

“Iceland’s balance of payments crisis can lead to considerable pressure on the krona and even the insolvency of some parties,” Gudmundsson said today a meeting in Reykjavik.

At the IMF, the view is that “given the distortive costs of maintaining controls for a very long time, you do want to be proactive in moving towards liberalization,” Ostry said. “But not before the risks that gave rise to the need to impose controls have been adequately dealt with.”

The new government, which ousted a Social Democrat-led coalition that had targeted euro adoption as a next step after capital controls, says it will try to remove Iceland’s currency restrictions during the current four-year electoral term.

“We want to do that and we’ll explore all options in order to do that,” Benediktsson said. “It may happen in some sort of stages, but we can’t afford to be tangled in capital controls over a long period of time.”

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