mar guðmundsson : lifting capital controls in iceland speech by mr mar guðmundsson, governor of the central bank of iceland, at a meeting organised by the european economics and financial centre, london, 26 may 2016. * * * chairman, ladies and gentlemen, comprehensive capital controls were introduced in iceland in november 2008, as part of the economic programme that the icelandic authorities had developed with the imf. the month before, around 90 % of the banking system had collapsed when iceland ’ s three overblown cross - border banks failed. earlier that year, iceland had experienced a full - scale sudden stop currency crisis during which the currency plummeted by 26 %. it depreciated by another 26 % during the banking collapse and in the weeks afterwards. and if this were not enough, iceland was at this point on its way into a recession, as the big, unsustainable macroeconomic imbalances – most clearly demonstrated in a double - digit current account deficit – were beginning to correct. the economic programme with the imf had three key goals : stabilisation of the exchange rate, fiscal sustainability, and reconstruction of the financial sector. comprehensive capital controls were an important element in the programme, but the rationale behind them was to help stabilise the exchange rate after the currency had fallen more than 50 % in 2008, and in addition, the stock of relatively liquid foreign - owned kronur – a legacy of carry trade and other capital inflows – amounted to around 40 % of gdp and would have resulted in a further meltdown of the currency if it had begun to flow out through iceland ’ s shallow fx market. after the split of the failed banks had been executed towards the end of 2010, it gradually became clear that it had not been a pure domestic / international split. the estates of the old banks held significant domestic assets, while only a small part of their claims were domestic. this posed a significant balance of payments problem for iceland and, if left unmitigated at the point of resolution and distribution to creditors, could potentially have had a severely detrimental effect on the exchange rate and financial stability. the estates of the old banks were therefore brought under the capital controls in march 2012. in late 2008, the combination of capital controls and exchange rate stability was in several ways a key to stabilising the economy. first, a very significant part of private sector debt was either directly linked to the exchange rate or indirectly linked to it through

inflation developments, and whether we might be better off locked away inside one of the super - currencies, obeying the laws that apply there and at the mercy of the decisions of others. all these considerations and many others can stoke the fires of debate at this conference in iceland. some people maintain that the incredible gains that iceland has made over a very few years could only have been achieved because the country had its own currency. others say that the consequences may be more difficult to deal with and more persistent precisely because the country has its own currency and is not under the wing of a large currency area. yet others claim that if iceland fixes itself against another currency and obeys the laws of others – interest rates based on what is happening in france, italy and germany and not in iceland – that this will produce a more cautious attitude up here in the frozen north, the appetite for risk will diminish and economic developments will take a healthier turn. thus there are countless questions, of which i have mentioned only a few. of course i have taken care in these opening remarks to leave all these questions open for those who follow. it is a particular pleasure to have lured so many distinguished guests here to do theoretical battle about these questions. it is equally welcome to give our leading experts the opportunity and time to ponder these issues and present their own views. so everything promises a rewarding outcome from this conference. it has been organised with ample reason, in the right place and at the right time, and with exceptionally qualified speakers.