Iceland continues to restrict investment

Having spent much of the last 10 years trying to keep foreign investment from escaping their fragile economy, Iceland now seem intent on forcing said investors onto other markets.  Back in June, overseas investors were left with a difficult decision.  Either sell their stakes at a below-market value, or find their capital locked indefinitely in local banks at base rate interest.

Despite this difficult situation, many feel their investments are better placed if they remain.  This situation has grown from the wholesale turnaround in Iceland’s relationship with foreign investors.

Not so long ago the country was regarded as a financial institution, as its banks grew off the back of a strong bonds market, and an innate ability to attract foreign depositors with high interest rates.  As with much of the industry, this all came to an end in 2008 when many reacted to the economic downturn by pulling their capital out of Icelandic banks, seriously damaging the Krona almost overnight.

Despite experiencing this recent turmoil, fund managers are increasingly trying to invest in Icelandic government bonds, despite the implementation of these capital controls.  Iceland is one of the few markets globally that can offer a combination of high interest rates and strong economic growth prospects.

The government on the other hand see little point in attracting any further foreign investment. Their primary aim is to keep the $16.7 billion economy of the island free from another boom and bust.  They simply don’t need the capital, and have no intention of making the same financial mistakes.

With many bonds maturing this month, the government will begin its placement of proceeds into newly created Icelandic savings account, which pays investors a basic 0.50% interest.  It seems until financial controls are loosened, many will have to wait out their returns.