Iceland should take a cautious approach to removing remaining capital controls which it put in place at the height of the financial crisis, but which are now blamed for slowing economic recovery, its finance minister said on Thursday. Iceland's economy nose-dived when its banks collapsed in 2008 and the country was forced to take a $2.1 billion bailout from the International Monetary Fund.
That programme ended in August - successfully according to both the government and the IMF. But challenges remain. Growth is tepid and some of the capital controls put in place to protect the currency in late 2008 have yet to be removed.
"I am on more on the cautious approach side," Finance Minister Steingrimur Sigfusson said on the sidelines of an IMF conference when asked about the removal of capital controls.
"The question is in what steps (we should remove controls) and how quickly. After all the hard work we have delivered to put Iceland on track it would be foolish to move into some risky experiments."
Some economists blame capital controls for discouraging investment and hampering growth. Others say removing them too quickly would send the krona plunging again.
Central bank Governor Mar Gudmundsson told Reuters on Wednesday the country needed to reduce the amount of Icelandic assets held by overseas investors and currently trapped by controls before a complete removal could be considered.
Gudmundsson said the central bank planned next month to restart auctions aimed at mopping up some of the nearly 500 billion Iceland crowns of assets - or about 30 percent of GDP - held by investors left over from before the crash when short-term investors piled in to take advantage of high rates.
However, the central bank's aim was still to remove controls by the end of 2013.
The collapse of Iceland's top banks, which toppled within a week of each other in late 2008, rates as one of the worst financial disasters in history. The economy shrank by more than 10 percent in total in 2009 and 2010.
"Iceland was hit by a perfect storm in 2008," Prime Minister Johanna Sigurdardottir said at the conference. "There can be no doubt that Iceland learned its lessons the hard way."
Economists took turns in heaping scorn on the build-up to the bubble, which saw banking assets rise to 10 times the country's GDP and banks build up a financial empire across northern Europe, financed by unsustainable levels of borrowing.
Willem Buiter, Citigroup's chief economist, called the bubble "collective madness", saying there had been a "near- universal collapse of common sense" on the island.
Paul Krugman, economics professor at Princeton University, said: "Iceland was awesome in the scale of its craziness".
After a painful recession, tax hikes and big cuts in government spending, the country is getting back on its feet again. But much remains to be done.
Capital controls remain in place, households and companies remain laden with debt and unemployment - though falling - remains much higher than before the crisis. Banks are not lending and investment levels are low.
Growth is expected at just 1.6 percent next year, according to the central bank and a quick pick-up is not on the horizon.
Economists at the conference suggested a number of measures.
Removing capital controls as quickly as possible was one, with a hefty tax on investors wishing to get out of the currency an option to prevent a renewed collapse in the currency.
The banking system should also be overhauled again, splitting the current domestic banks into good banks, which would start lending again, and bad banks which would manage the delinquent credits that make up 30 percent of lending books.