Iceland capital controls exit could set precedent

Significance

The island is on track to start receiving early this year the 'stability contribution' that creditors of its three large failed banks have agreed to pay in return for regaining access to their assets, clearing the way for the -- probably gradual -- lifting of capital controls. Iceland could become an important international example of lifting capital controls without a fresh currency crisis, further public assumption of debt or litigation by creditors.

Impacts

• If it persists, international markets' febrile state will make it especially hard to assess post-liberalisation risks for the krona.
• CBI rate rises are extra insurance against a post-liberalisation devaluation, but could complicate inflation and capital-flows policy.
• President Olafur Ragnar Grimsson will stand down after 20 years when his term ends in June, reinforcing the sense of an era ending.
• The January 1 entry into force of the euro-area's controversial new bank resolution regime will highlight Iceland's different path.
• Being one of the few states to prosecute and sentence bankers for their pre-crash actions will reinforce Iceland's distinctiveness.