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February 9, 2017

Iceland’s Latest Monetary Bulletin Contradicts Rationale for Freezing Foreign Investors

Yesterday, the Central Bank of Iceland’s Monetary Policy Committee released its quarterly Monetary Bulletin, announcing, among other things, that the Central Bank will keep its key deposit interest rate unchanged at 5%, after cutting the rate in December.

Overall, the MPC is once again forecasting a rosy economic outlook for the island nation. GDP growth is now forecasted at 6% for the year, a full percentage point higher than the committee’s 5% November forecast, and the CBI expects the economy to continue to grow rapidly for the next several years.

The bulletin made no mention of the ongoing struggle faced by the country’s offshore ISK investors, whose assets the Icelandic Government has threatened to lock in extremely low-interest bank accounts after their refusal to divest from the country at a massive discount in a so-called “auction” last spring. Perhaps unintentionally, however, the bulletin did help to underscore why Iceland’s rationale for stiffing bondholders has become increasingly farcical.

In both the bulletin and the brief statement that accompanied it, the CBI states, “The Bank’s transactions in the foreign exchange market will also take into consideration that there is no longer a need to build up the foreign exchange reserves further and that the risk of a temporary overshooting of the exchange rate during the run-up to capital account liberalisation has diminished in the wake of the recent completion of major milestones in the liberalisation process.”

This directly contradicts claims made by the government (which still appear on the Ministry of Finance and Economic Affairs’ website) that Iceland “does not have enough foreign currency” to meet its obligations to investors, which it has used repeatedly in defense of its attempt to force them out at a loss. The announcement promises to only further aggravate a situation that has drawn international outcry over discriminatory treatment of foreign investors.

The important caveat here, of course, is that the government that escalated this dispute is no longer in place.  Following months of contentious negotiations, Iceland now has a new government, and it remains to be seen how Prime Minister Bjarni Benediktsson will move forward with the situation he inherited.

While the former government seized on the opportunity to vilify foreign investors as part of a populist agenda, Prime Minister Benediktsson may look to reassure the markets by normalizing Iceland’s relationship with foreign investors, and hope remains that this report is merely the first step in doing so.