Icelandic Companies Turning Away From Krona as Controls Linger

Five years after the Icelandic banking crisis the country’s largest companies are turning away from the krona by funneling profits into investments that can easily be sold abroad, according to Heidar Gudjonsson, managing director of investment company Ursus ehf.

“It’s better to keep your equity in a product you can easily offload in the international market for hard currency,” said Gudjonsson, who’s chairman of Eykon Energy ehf and a board member of Fjarskipti hf, Iceland’s Vodafone franchise. “This results in there not being any current account surplus in Iceland, only because large Icelandic companies don’t want to hold any kronur.”

After managing to claw its economy back from the brink of a financial abyss and seeing its creditworthiness restored, the currency risk will lead the country to its next crisis, according to Gudjonsson. With consumer prices rising 5,055 percent in the past 34 years, adopting another currency could help achieve greater stability, he said.

Iceland needs to fix four flaws embedded in its economy, including adopting a new currency and monetary policy, restructuring the banking industry, trimming the size of government and putting an end to the unprofitable use of natural resources, he said.

Sovereign Default

If nothing is done “by the end of 2016, we’ll have a sovereign default, leading to another collapse of the banking sector,” he said, reiterating a previous prediction. “I feel good about Iceland’s long-term prospects, however, I don’t feel so great about the country’s short term-prospects.”

Iceland has been able to resurrect the economy since the 2008 collapse, after being bailed out by the International Monetary Fund and by relying on traditional industries such as fishing and tourism, which were boosted by the weak krona. Its decision to not bailout its three largest banks helped government finances, allowing the government to write-off consumer debt.

The country is still seeking a way to exit capital controls that have been in place since 2008, after the collapse of Landsbanki Islands hf, Glitnir Bank hf and Kaupthing Bank hf triggered a sell-off that sent the currency plummeting as much as 80 percent against the euro offshore. The restrictions are blocking about $7.2 billion in assets from leaving the country, equal to about half the $14 billion economy.

Accepting Controls

Instead of struggling to remove the controls, policymakers need to accept them as a key feature in the next step out of the crisis, according to Gudjonsson.

“When countries want to unilaterally adopt another currency they need to impose capital controls,” he said. “The question is, how fast we can do away with the restrictions once we’ve adopted an international currency. The experience of the 33 countries that have unilaterally adopted another currency is that they can lift the controls within 12 months.”

Iceland’s largest companies are now avoiding having their equity in kronur, said Gudjonsson, who has invested in companies such Fjarskipti hf, utility HS Veitur hf and oil company Eykon Energy ehf. He cited shipping investments by Eimskip hf, Icelandair ehf buying airplanes, and “all” fishing companies buying ships.

The country isn’t producing enough “hard currency” to meet foreign obligations, he said. This could put it on the path to a sovereign default by 2016, another collapse of the banking sector and force Iceland into another economic program with the IMF, he said.

Non-Krona Debt

Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($6 billion), the central bank said in October. The projected current account surpluses over the next five years aren’t estimated to reach even half of that, the bank said.

The IMF has said Iceland is unlikely to be able to remove the controls before 2015. The previous Finance Minister Katrin Juliusdottir said the most viable prospect was to keep some form of restrictions until the country could adopt the euro.

The current administration, which took power last year, takes a different view. After abandoning the European Union accession talks, Prime Minister Sigmundur D. Gunnlaugsson says the country will have to live with the krona for now.

Iceland, which completed a 33-month IMF program in August 2011, is outgrowing much of Europe as it rebounds from its deepest recession in six decades. The economy will expand 2.7 percent this year, according to the Organization for Economic Cooperation and Development. That’s better than the average for the OECD-area as a whole, which will grow 2.3 percent, the Paris-based group estimates.

For now the “external factors are extremely positive,” Gudjonsson said, while “the internal factors of the economy which we can control -- are seriously flawed.”