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Iceland Targets New Currency Control Exit Program by September

May 28 (Bloomberg) -- Iceland’s government plans to unveil a new plan by September outlining how the island will scale back currency controls in place since 2008, Prime Minister Sigmundur D. Gunnlaugsson said.

“It won’t take too long to complete the work,” the premier, who took over as head of government last week, said yesterday in an interview in Reykjavik. “We will speed up that work, which is a collaboration of the central bank and the government. I expect a special ministerial commission will review these matters, in conjunction with the central bank.”

Gunnlaugsson, who together with Finance Minister Bjarni Benediktsson has pledged to target a swift removal of capital controls, made clear this week the nation will need to keep some restrictions in place to prevent currency speculation. Iceland is struggling to unwind curbs on the krona that have protected it from a sell-off since the 2008 financial meltdown. Central bank Governor Mar Gudmundsson said yesterday a “different strategy” may now be warranted.

Offshore creditors representing about $8 billion have been trapped by the capital controls since Iceland tried to seal off its markets more than four years ago.

The central bank has tried to protect the krona from losses as controls are gradually unwound by raising interest rates. Iceland’s benchmark rate is 6 percent, compared with 0.5 percent in the euro zone. The bank earlier this year suspended purchases of foreign currency, designed to build up reserves, and in February opted instead for direct currency market interventions.

Debt Forgiveness

Iceland is also asking creditors in the failed banks to forgive about $3.6 billion in krona-denominated claims to help take pressure off the currency once controls are phased out. Without forcing losses on to bondholders, Iceland can’t return to a currency regime that is guided by market forces, Gunnlaugsson has said.

Iceland hasn’t shied away from taking extreme measures with investors in the past. Bondholders in the nation’s biggest banks were forced to accept an $85 billion default, dwarfing Iceland’s $14 billion gross domestic product, when the government refused to bail out the financial industry more than four years ago.

Gunnlaugsson said he has “certain ideas on how to resolve” the krona overhang that he plans to discuss with the central bank. He declined to elaborate.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net.

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