Baluarte
05-10-2013, 09:21 PM
Icelandic governor says managed float and strong supervision are important lessons to be taken from Singapore; says capital controls helped avoid a default in Iceland, but should not be used lightly
Már Guðmundsson, governor of the Central Bank of Iceland, has said Singapore's model of monetary policy and regulation provides a good method of maintaining financial stability.
In an interview published today in Central Banking Journal, Guðmundsson said both Singapore and Asia more generally had learned the lessons of the Asian financial crisis in 1997 when the global financial crisis of 2008 hit.
Particularly important was to lean against capital flows. "The lesson for small, open economies such as Iceland was that it is not good policy to have just benign neglect regarding capital flows and swings in the exchange rate," Guðmundsson said.
Iceland learnt this lesson first hand when the financial crisis hit its over-leveraged banking system. Two-thirds of the combined balance sheets of its three major banks, Glitnir, Kaupthing and Landsbank, were denominated in foreign currencies in 2008. When confidence collapsed this led to rapid capital flight and sharp drop in the value of the króna, which plunged to about 50% of its previous value.
At this point Iceland introduced capital controls, preventing foreign depositors fleeing. Guðmundsson said the idea of imposing controls came from the IMF, which was providing emergency assistance to the country at the time. He said he agreed with the fund's stance, updated officially in November 2012, that controls could be useful in some circumstances, but "countries should not introduce capital controls lightly".
Guðmundsson also said Iceland needed to change its monetary policy, from a flexible inflation target with a free-floating currency to what he dubbed "inflation targeting +++" – a target combined with a managed float. "That is precisely what Singapore and many other Asian countries do," he said.
Flexible exchange rates were part of the problem in the run-up to the crisis, Guðmundsson said, as "huge balance sheet effects" caused chaos in the banking sector, ultimately wiping out around 90% of the banking system.
After the storm, the low exchange rate helped with the economy's rebalancing, but this had limits, as many exporters were constrained from the supply side. "You do not catch more fish just because the exchange rate is lower," he noted.
In the future, however, Guðmundsson stressed that the central bank would intervene earlier.
"If we have strong capital inflows again, then we should lean against them," he said, but added that the central bank could only do so much. "You can run into serious difficulties with your financial sector and with your sovereign finances irrespective of the exchange rate regime," he said.
Már Guðmundsson, governor of the Central Bank of Iceland, has said Singapore's model of monetary policy and regulation provides a good method of maintaining financial stability.
In an interview published today in Central Banking Journal, Guðmundsson said both Singapore and Asia more generally had learned the lessons of the Asian financial crisis in 1997 when the global financial crisis of 2008 hit.
Particularly important was to lean against capital flows. "The lesson for small, open economies such as Iceland was that it is not good policy to have just benign neglect regarding capital flows and swings in the exchange rate," Guðmundsson said.
Iceland learnt this lesson first hand when the financial crisis hit its over-leveraged banking system. Two-thirds of the combined balance sheets of its three major banks, Glitnir, Kaupthing and Landsbank, were denominated in foreign currencies in 2008. When confidence collapsed this led to rapid capital flight and sharp drop in the value of the króna, which plunged to about 50% of its previous value.
At this point Iceland introduced capital controls, preventing foreign depositors fleeing. Guðmundsson said the idea of imposing controls came from the IMF, which was providing emergency assistance to the country at the time. He said he agreed with the fund's stance, updated officially in November 2012, that controls could be useful in some circumstances, but "countries should not introduce capital controls lightly".
Guðmundsson also said Iceland needed to change its monetary policy, from a flexible inflation target with a free-floating currency to what he dubbed "inflation targeting +++" – a target combined with a managed float. "That is precisely what Singapore and many other Asian countries do," he said.
Flexible exchange rates were part of the problem in the run-up to the crisis, Guðmundsson said, as "huge balance sheet effects" caused chaos in the banking sector, ultimately wiping out around 90% of the banking system.
After the storm, the low exchange rate helped with the economy's rebalancing, but this had limits, as many exporters were constrained from the supply side. "You do not catch more fish just because the exchange rate is lower," he noted.
In the future, however, Guðmundsson stressed that the central bank would intervene earlier.
"If we have strong capital inflows again, then we should lean against them," he said, but added that the central bank could only do so much. "You can run into serious difficulties with your financial sector and with your sovereign finances irrespective of the exchange rate regime," he said.