Iceland Explores Tobin Tax to Protect It From Carry Trade Risks

  • Tobin tax could be one of many measures, lawmaker says
  • Says measures could be needed permanently to ensure stability

Iceland will need a broad package of measures, including potentially a financial transaction tax, to ensure stability as it prepares to unwind the last of its capital controls, according to the head of parliament’s economic affairs committee.

"There’s probably no single solution that resolves everything," Frosti Sigurjonsson, chairman of the committee, said in a telephone interview. "A Tobin tax could be one of many measures, but I think it’s better to have more than less alternatives."

Policy makers at the central bank are working on a plan to prevent so-called carry trading from once again imperiling financial stability. As Iceland moves closer to doing away with krona restrictions, in place since its banks collapsed in 2008, investors are showing renewed interest in one of the world’s smallest currencies to profit from the country’s higher interest rates.  

In response to accelerating inflation, the central bank has raised rates three times since June to 5.75 percent, driving foreign demand for its debt. With other benchmarks rates across the world near zero, or even below, foreign investors now control more than 24 percent of Iceland’s government debt market.

Central Bank Governor Mar Gudmundsson said in an interview in November that monetary policy was being challenged by the renewed carry trade and that it was looking at measures to reduce investors interest in short-term krona positions, including a tax or minimum reserve requirements with very low or no interest.

The country at the end of last year reached agreements with the creditors of the three failed banks that caused its financial meltdown in 2008 and is now preparing an auction to free offshore krona accounts and to lift restrictions for households and companies. The creditors have started receiving some of the $17 billion that had previously been blocked. Another 291 billion kronur ($1.6 billion) is held by offshore accounts, which will in March be offered to swap the money into a foreign currency at a discount, Icelandic Treasury bonds, or have their cash locked up in non-interest bearing krona accounts.

Any measures imposed could very well be needed permanently, Sigurjonsson said.

“There’s nothing that states that it can’t be forever,” he said. “You can’t wish away instability, you just have to resolve it through certain measures."

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