(Updates prices, adds quotes, detail, stock markets)
By Sujata Rao
LONDON, March 13 The Icelandic crown posted its
biggest one-day fall in eight years on Monday after the
government said it would lift all remaining capital controls
this week, a move that could trigger initial outflows of
pent-up foreign and domestic money.
The finance ministry said on Sunday that in the following
week it would lift all remaining capital controls that affect
individuals, firms and pension funds. Iceland had already
started dismantling capital controls for local residents last
The move could eventually bring more cash into Icelandic
markets, where five-year bonds pay yields of almost 5 percent
and data recently showed the economy growing at over 11 percent,
the fastest pace in 10 years.
But on Monday, the crown fell around 3 percent
versus the euro to three-week lows of almost 119 per euro, also
falling by a similar amount to the dollar.
However, it had earlier this month hit a near-nine-year
high to the euro, thanks to strong tourism receipts, and Jakob
Christensen, a strategist at Danske Bank, said authorities would
be pleased to see the currency weakening.
"Some crown weakening is probably expected and desired by
the authorities. Expected, because there is a bit of pent-up
demand for foreign assets within Iceland. Desired, because...
the crown has probably been getting to levels where the
authorities are starting to feel uncomfortable," Christensen
"The issue (for investors) has been the possibility of
getting money out, and there have also been restrictions on
Icelandic pension funds' ability to invest abroad."
Under the new rules, citizens will no longer be required to
repatriate foreign currency and pension funds can be invested
abroad without restrictions.
"This isn't necessarily a sign that the crown is about to
depreciate sharply, rather we think it will stem the upward
pressure on the currency," said Stephen Brown, European
economist at Capital Economics in London.
Icelandic stocks jumped 1 percent, while
crown-denominated bonds were flat on the day, according to data
from the Icelandic debt agency.
The tiny country of just over 300,000 people resorted to
capital controls after its three biggest banks collapsed and the
crown fell more than 30 percent in 2008. That trapped many
foreign investors who had flocked to Iceland, lured by its high
Analysts at Iceland's Arion Bank noted that special reserve
requirements would stay in place to prevent a resurgence of huge
inflows to Icelandic bonds from foreign yield-seekers.
"Therefore, new foreign capital inflows to crown-denominated
bonds seem unlikely," they told clients, adding: "The
restrictions that are being lifted induce capital outflow in the
(Additional reporting by Karin Strohecker, Niklas Pollard and
John Geddie, editing by Pritha Sarkar)