As Iceland goes, so goes the world?

During the 2008 market meltdown, Iceland imposed capital controls on foreign investors in “offshore Krona funds” (Krona is Iceland’s currency).

Now Iceland’s government has announced it is lifting the controls. So lovers of liberty should rejoice that Iceland has seen the light, abandoned capital controls, and embraced free-markets, right?

Well not so much…

Instead of simply lifting the controls, Krona fund investors can only escape the controls if they “agree” to a departure tax. The tax could equal as much of 58% of the investors holdings!

So why would any investor agree to pay this “exit tax?”

Because if they don’t, their Krona-denominated offshore accounts will be “segregated” into funds that are only allowed to invest in krona-denominated deposit certificate issued by the Central Bank of Iceland (CBI).

These special CDs pay a whooping .5 interest per year.

According to the Iceland officials, investors who do not take advantage of the government’s offer can expect to have their assets trapped in Iceland’s central bank prison for years.

Icelandic authorities claim that they are not devaluing this debt since investors have a choice–either pay their taxes or allow the central bank to devalue their investments.  However, it is clear that Iceland’s actions meet Moody’s definition of a default:

“a change in the payment terms of a credit agreement or indenture imposed by the sovereign results in a diminished financial obligation, such as a forced currency redenomination … or a forced change in some other aspect of the original promise, such as indexation or maturity.”

Iceland’s actions are certainly anti-liberty and, by discouraging future investments in the country, economically destructive, but why should Campaign for Liberty members care what a foreign government does?

There are three reasons to care:

First, Iceland could serve as a model for other governments seeking to impose controls on the free movement of capital in order to squeeze more revenue out of investors.

Already the US already has an exit tax. Is it too much to imagine the Federal Reserve would work with the IRS and Immigration authorities to add teeth to those controls by seizing the assets and eroding the value of anyone who left the country without paying the exit tax?

Secondly, those actions would affect many Americans. The capital owned by American investors will taxed away by the Icelandic government-either via the exit tax or by the Iceland central banks’  inflation tax. That’s capital that cannot be used to create new businesses and jobs in America.

Thirdly, thanks to the US Government, American taxpayers may be indirectly subsidizing these policies. In 2008, the US taxpayer-funded International Monetary Fund helped bailout Iceland’s government.

The IMF does not just dole out money, it takes a very active role in adjusting the economic policies of countries receiving IMF assistance. Therefore it is reasonable to ask what, if any role, the taxpayer-funded bureaucrat at the IMF played in developing Iceland’s economic polices.

Representative Dennis Ross (FL-18) has written a letter to the IMF’s US Executive Director asking for more information about the agency’s role in the Iceland’s government’s assault on foreign investors: