UPDATE 1-Iceland capital controls plan 'appropriate' - IMF

Mon Jun 6, 2011 5:14pm BST

(Adds details from conference call, IMF documents)

WASHINGTON, June 6 (Reuters) - Iceland's new plan to lift capital controls in two phases is a "difficult challenge" and will depend on the country returning to global capital markets, a senior International Monetary Fund official said on Monday.

IMF mission chief to Iceland Julie Kozack told a conference call with reporters the authorities' commitment to strong policies should enable the economy to stay on the course of recovery.

The IMF approved a $225 million loan disbursement for Iceland on Friday as it nears the end of a $2.1 billion IMF program agreed in 2008 after its top banks collapsed, forcing it to seek financial aid from the IMF and Nordic partners.

"The authorities' strategy strikes the right balance between moving cautiously and not eroding any of the gains made so far which could undermine confidence," Kozack said.

She said it was up to Iceland's government to decide whether it wants a follow-up IMF loan program.

Kozack said it was important that Iceland return to the markets as quickly as possible, although the fund does not have a specific timeline in mind for when that should happen.

"The sooner Iceland can return to markets the better," Kozack said, adding: "It (would be) a very strong signal of a normalization of Iceland's relationship with international capital markets and that is an important signal."

In a sign of its recovery, Iceland has begun meeting with investors about a possible Eurobond as it prepares its first international sale of bonds since its economic meltdown.

Kozack said Iceland's credit default swap spreads have been at post-crisis lows of around 210 basis points, which "gives us some comfort that Iceland may be able to issue (debt) at reasonable rates."

Debt crises in Ireland, Greece and Portugal have pushed up borrowing rates.

The latest IMF review was delayed due to a nationwide referendum in which Icelandic voters rejected a revised $5 billion repayment plan for Britain and the Netherlands for money lost in a Landsbanki Icesave accounts during the financial crisis.

The dispute will now be decided through legal channels.

An IMF report released on Monday said a better-than-expected asset recovery of Landsbanki estate "provides comfort that public finances will remain on a sustainable path even if Iceland is found to have a sovereign obligation in the Icesave dispute".

Kozack said the IMF was initially concerned that the uncertainty around the unresolved Icesave dispute could affect investment plans and hurt economic growth in Iceland. However, she said 2011 investment projects remain well financed and have not been affected by the Icesave dispute.

"We have not revised our investment projections down and we are still confident investment will continue going forward, and that growth will be investment led," she added. (Reporting by Lesley Wroughton; Editing by James Dalgleish)

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