Lánamál ríkisins - Company Announcement

Comprehensive strategy for capital account liberalisation announced

  -- ISK 1200 billion problem solved; stability ensured
  -- Stability conditions and stability tax on failed banks' estates
  -- Currency auction for holders of offshore ISK in the autumn



At a meeting held yesterday, the Government of Iceland agreed to present before
Parliament two bills of legislation sponsored by the Minister of Finance and
Economic Affairs. Together, the two bills lay the foundation for a
comprehensive strategy for capital account liberalisation. 

The public interest demands that the capital controls be lifted without
jeopardising economic and financial stability. The objectives of the current
liberalisation strategy are based on the fundamental principal that the
controls must be lifted in stages without upsetting the balance in the economy
and without imposing additional financial burdens on the Treasury or the
Icelandic people. 

The total value of the assets underlying the problem addressed in the
authorities' strategy is about 1,200 billion Icelandic krónur. The assets fall
into three categories: the ISK assets of the failed banks' estates, which total
500 billion krónur; the estates' foreign-denominated claims against Icelandic
residents, which total 400 billion krónur; and the offshore krónur held by
non-residents, which total 300 billion krónur. The authorities' strategy
prevents these assets from flowing into the foreign exchange market and thereby
adversely affecting Iceland's balance of payments. 



Stability conditions and stability tax on failed banks' estates

The solution to the problem concerning the failed financial institutions'
estates is twofold: stability conditions are introduced and a stability tax put
in place. The stability conditions, which have been approved by the Ministerial
Economics Committee and the Steering Committee for capital account
liberalisation, are intended to prevent adverse effects stemming from
distribution of capital. If the estates complete composition agreements by the
end of 2015, they can obtain authorisation to transfer funds, provided that
they fulfil the stability conditions; otherwise, they will be subjected to the
stability tax. The intention is to simplify the rules currently applying to the
execution of composition negotiations by means of a bill of legislation
amending the Act on Financial Undertakings, no. 161/2002. The bill also
includes provisions requiring that a financial institution's composition
proposal (scheme of arrangements) be approved by a District Court Judge unless
the Central Bank of Iceland has determined that it does not pose a threat to
monetary, exchange rate, or financial stability. 

A new bill of legislation on a stability tax imposes a one-off 39% tax on the
total assets of the failed commercial or savings banks in accordance with their
assessed value as of 31 December 2015. The tax is intended as to address the
negative effects that would derive from full distribution of capital upon the
conclusion of taxable entities' winding-up proceedings. After the tax has been
paid, and upon fulfilling specified conditions, the taxable entities will be
granted an exemption from the Foreign Exchange Act, no. 87/1992. Those entities
that are currently in winding-up proceedings and conclude them with an approved
composition agreement by 31 December 2015 will not be considered taxable
entities. 

Furthermore, amendments to the Foreign Exchange Act passed by Parliament
yesterday evening are intended to reinforce the premises of the Government's
capital account liberalisation measures and offset the risk created when
foreign exchange transactions and capital transfers by certain parties are
liberalised in stages. 

Together, these bills of legislation form a comprehensive solution to the
problem that settlement of the failed financial institutions' estates and
distribution of capital to their creditors would create if no action were
taken. It is estimated that Treasury revenues from the stability tax could
total ISK 682 billion, after adjusting for authorised deductions. The
unadjusted tax amounts to ISK 850 billion. The stability conditions solve the
problem in roughly the same magnitude as the stability tax, but using a
different methodology and approach. 

The capital reverting to the State as a result of the stability conditions or
stability tax must not have adverse effects on the money stock; furthermore, it
must not have other expansionary effects that could undermine economic
stability. This capital will be used to reduce Treasury debt as the opportunity
arises, as the Treasury has borne substantial expense from the collapse of the
financial system. When the settlement of the failed banks' estates and the
liberalisation of capital controls are complete, major uncertainties concerning
the Treasury's debt service burden will have been eliminated, and it is assumed
that interest premia and interest expense will decline markedly. 



Currency auction for holders of offshore ISK

The stock of offshore krónur creates a problem in connection with capital
account liberalisation, as it consists of highly liquid foreign-owned ISK
assets that would presumably have a strong impact on exchange rate stability if
attempts were made to release them all at once. The offshore ISK problem is
solved with currency auction and the sale of ISK- and EUR-denominated bonds
with a maturity profile consistent with Iceland's balance of payments. Owners
of offshore ISK can choose from among three options: currency auction,
long-term Treasury bonds, or locked non-interest-bearing accounts. The auction
process ensures that all offshore ISK will be brought under control. The
offshore ISK owners that bid on foreign currency in exchange for their krónur
will pay a premium for doing so, thereby bearing the necessary cost of
releasing them from the confines of the capital controls. 

Further information can be found on www.fjr.is/afnam.