Speeches and articles

Article by Bjarni Benediktsson in the Wall Street Journal

6/16/16

Bjarni Benediktsson's article in the US edition of the Wall Street Journal, published on June 16:


The implication of the headline “Northern Europe's Argentina Imitator” atop James K. Glassman's June 13 op-ed is risible to anyone who is even remotely familiar with the Argentina and Iceland stories. 

In the years leading up to the collapse of Iceland's banking system in December 2008, the Icelandic economy overheated and the Central Bank ran a tight monetary policy. This was a beckoning finger for the carry trade. Investors would borrow in currencies with low interest rates (like Swiss francs or Japanese yen) and then invest in high-yielding debt instruments denominated in Icelandic krona. At the time, Iceland had no tools in place to manage these capital inflows.

When the economy collapsed in 2008, Iceland—with the full approval of the IMF—was forced to impose capital controls. Among the krona-denominated assets caught by the capital controls were the so-called “offshore krona”—most of it the fruit of pre-2008 carry-trade operations. Capital controls have remained in place since 2008. Iceland is only now in a position to gradually liberalize these controls. 

In recent years hedge funds, like Mr. Glassman's clients, have purchased these offshore krona positions from the original investors at steep discounts. Although the investments were knowingly made into an economy with capital controls, the hedge funds now apparently believe that they are entitled to be taken out of these positions at a significant profit before Iceland even begins to lift the burden of capital controls on its residents.

Mr. Glassman states that the Icelandic Parliament has passed legislation ordering the “conversion [of offshore krona] at between 190 and 210 krona to the dollar.” Parliament has done no such thing. The Central Bank of Iceland has announced that it will auction some of its foreign-exchange reserves to repurchase offshore krona for those holders who wish to exit their investments at this stage. Participation in the auction (the 22nd in a series of such auctions, by the way) is wholly voluntary. The bidders will decide what exchange rate they wish to bid and the Central Bank will decide what bids it can afford to accept.

Mr. Glassman writes of “Iceland's unilateral decision to default” and suggests that this is equivalent to Argentina's default on its sovereign bonds in 2001. Iceland has not defaulted on any of its government debt and is not proposing to do so now. Mr. Glassman apparently believes that the maintenance of capital controls on local currency assets in the wake of a devastating financial collapse is tantamount to a payment default on sovereign external debt.

There is one, but only one, similarity between Argentina and Iceland. Following the economic collapse in each country, a few hedge funds acquired distressed local assets for pennies on the dollar. If disappointed in the amount of profit they can turn on those trades, articles by hedge-fund lobbyists are sure to follow. 

Bjarni Benediktsson

Minister of Finance and Economic Affairs

Reykjavik, Iceland

Wall Street Journal article