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Swelling Iceland Cash Raises Capital Control Risks, TM CEO Says

Removing Iceland’s capital controls is becoming harder as the high interest rates, deployed to backstop the krona, are swelling the amount of captive money held by offshore investors and posing a risk to the equity market, the head of TM Insurance Ltd. said.

“The central bank upholds very high interest rates” which drives up the amount of offshore kronur owned by “foreigners that want to get out of the economy,” said Sigurdur Vidarsson, chief executive officer of Tryggingamidstodin hf, which went public last week, in an interview in Reykjavik. “Every day the problem is getting bigger and more unmanageable.”

Iceland is struggling to end controls put in place in 2008 after the collapse of the nation’s three biggest banks sent the economy and the krona into a tailspin. The central bank, which announces its next rate decision on May 15, has tightened policy six times since August 2011, bringing its benchmark to 6 percent, to support the krona and cool inflation.

The restrictions are blocking as much as $8 billion in offshore krona holdings being divested, forcing them into other assets categories and making Sedlabanki “very concerned” of a bubble in the equity market, Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based bank, said in an interview this month.

Shares Surge

TM Insurance, which started as an insurer to the fishing industry in the 1950s and now also offers life and auto insurance, was one of the beneficiaries when it became the third company to go public this year. The shares rose more than 34 percent on May 8, its first day of trading on the Nasdaq OMX Iceland exchange. Holding company Stodir hf sold a 28.7 percent stake in the insurer for 4.4 billion kronur ($37 million). It received offers of 357 billion kronur at a price of 20.1 kronur a share.

The stock traded at 26.35 kronur when the market closed on May 10. The company was delisted in 2008 after its number of shareholders fell below a minimum requirement.

The next government, which is currently being negotiated after the April 27 elections, will need to start allowing Icelanders to invest their savings outside of the economy to keep the markets and economy from overheating, according to Vidarsson.

“All the valuables that are created in Iceland are stuck in Iceland,” he said. “If you take the pension funds, they alone have to invest for 134 billion kronur every year -- net. To put this figure into perspective, the combined value of the shares offered in TM Insurance and VIS Insurance, which also recently went public, was 19 billion kronur.”

Limited Investments

The predicament reveals the flipside of crisis-management policies that have helped the $14.4 billion economy emerge from financial failure and outgrow most of western Europe. Of the 17 companies on Iceland’s Nasdaq OMX Nordic exchange, six have been listed since the 2008 collapse. The shares in the six have risen 44 percent, on average, from their IPO pricing.

TM is Iceland’s third-largest insurer with total assets amounting to 27.4 billion kronur at the end of 2012. The company’s profits fall 23.2 percent to 2.6 billion kronur in 2012 from the previous year.

The first-day share gain is “relative,” said Vidarsson. “The question is whether the pricing of the public offer was too low or too fair or however you look at it. But, of course, the primary reason is the limited amount of investment opportunities and the capital controls.”

Even as the dangers of asset bubbles grow, also in the nation’s property market, the parliament in March removed a 2013 deadline for ending the controls to prevent another currency crisis.

Government Talks

Iceland’s Progressive Party is currently in talks on forming a government with the Independence Party. The two-largest opposition parties won the election on April 27, ousting the Social Democratic-led government, with promises to ease households’ debt burdens and impose writedowns on creditors holding local krona assets in the failed banks. The two parties have also set ending the capital controls as a priority.

Following the failure of Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf in 2008, the country received a $4.6 billion bailout led by the International Monetary Fund, a program it exited from in August 2011. Its economy is expected to grow 1.9 percent this year, according to the IMF. The euro area will contract 0.3 percent this year, the IMF says.

The foreign debt overhang and the capital controls on the krona are among the last hurdles to overcome before the nation can boast a full-fledged exit from its turmoil. It won a court battle against the U.K. and the Netherlands in January, freeing it from as much as $2.6 billion in damages for not honoring depositor claims stemming from failed Landsbanki.

Savings Flight

The central bank has been reluctant to speed up the process to not risk the krona. It has held dual currency auctions to ease the country out of the restrictions, even as it also started support purchases of kronur in February. The bank now also refused to grant Landsbanki an exemption to the controls to pay 200 billion kronur to the governments of the U.K. and the Netherlands, Morgunbladid reported on May 11, without saying how it obtained the information.

“When the capital controls are abolished, the pension funds should be among the first ones to get out,” said Vidarsson. “The pension funds would never take a run with all their investments out of the country. Individuals, however, might take all their savings out of the economy as soon as they get the chance.”

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