Iceland to ease restrictions for residents in step to scrap capital controls

REYKJAVIK (Reuters) - Iceland's government on Tuesday proposed major steps aiming to remove capital controls introduced after the 2008 financial crisis, including allowing residents to buy real estate abroad and purchase foreign currency for international trips.

The proposed changes, which are aimed at dismantling controls for local residents rather than foreign investors, will now go to parliament.

The vast majority of Icelanders would be unrestricted from the start of next year, the central bank governor told Reuters.

"Then the controls are not limiting for the majority of individuals," Mar Gudmundsson said at the sidelines of a press conference. "It is less than half a percentage of individuals which will be limited by the controls. Because others do not have free funds to reach the limit."

The bill would clear one the last barriers to remove controls introduced after the failure of three Icelandic banks and further reinsert the island of 330,000 people into the world economy.

From the start of next year, the requirement for domestic custody of foreign securities investments will be revoked according to the proposals.

The planned lifting of the controls comes as the economy is expected to grow more than 4 percent this year and with key interest rates at 5.75 percent, a strong draw for potential investors in a world of policy rates around or below zero.

With immediate effect, the bill proposes outward foreign direct investment would be unrestricted subject to confirmation by the central bank and that investment in instruments issued in foreign currency would be permissible up to a given amount.

The start of the lifting of the capital controls comes before a new general election in October, following the resignation of the then prime minister in April over the Panama Papers scandal involving the use of tax havens.

But the process to lift controls is not without difficulties, especially for foreigners who had their assets locked in Iceland after the controls were introduced.

In June, many foreigners holding the assets of failed banks chose not to accept the 190 crowns per euro offer by the central bank for those assets, in the final currency auction before the expected lifting of the controls.

After 83 billion Icelandic crowns ($709 million) were mopped up in the June auction and a post-auction tender, foreign investors still own 236 billion crowns worth of assets in the estates of the failed banks.

In June, the funds Eaton Vance and Autonomy Capital filed formal complaints through the European Free Trade Association (EFTA) where Iceland is a member, saying the restrictions on capital are discriminatory, unnecessary and not proportionate, EFTA filings showed.

The government said the proposed legislation would not make any legal challenges from international funds easier.

"I see nothing in this that strengthens in any way the view we have heard from the offshore ISK (the Icelandic crown currency) owners," Finance Minister Bjarni Benediktsson told Reuters.

The central bank governor said that situation for owners of offshore crowns that still had their assets in locked accounts would be looked at next year after all the currently proposed legislation had been put in place.

"Then we will reevaluate this and look at how soon we can abolish the capital controls completely. And full abolishment of course also refers to the offshore ISK," Gudmundsson said.

The capital controls were introduced to prevent investors holding Icelandic assets from selling them and taking the money out of the country after the failure of the banks Landsbanki, Glitnir and Kaupthing.

($1 = 117.0400 Icelandic Crowns)

(Reporting by Ragnhildur Sigurdardottir, writing by Daniel Dickson; Editing by Alistair Scrutton)

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