Iceland Officials Fret Growing Bubble Threatens Entire Pension System

Pension officials in Iceland are worried that some government policies are putting the country’s retirement savings at risk.

Iceland imposed capital controls in 2009 after the failure of major banks. The rules are designed to spur Iceland’s economy, and they’ve worked—Iceland’s main stock index is up 70 percent since the end of 2008.

But experts worry that the rules, which prevent pension funds from investing outside of Iceland, have created a bubble that could burst and take with it the retirement savings of the country’s citizens.

From Bloomberg:

Iceland’s 2.7 trillion kronur ($22.7 billion) of pensions are under threat by capital controls that risk generating bubbles in both equity and bond markets, the second-largest manager of retirement money said.

“We’re seriously concerned” that controls on the krona, imposed in 2008 to prevent a flight of capital, are risking Iceland’s entire pensions system, Asta Rut Jonasdottir, chairman of the Pension Fund of Commerce, said in an interview in Reykjavik on Sept. 11. “We’re worried about bubble formation and the work related to the removal needs to be done swiftly. We’ve waited much, much too long.”

Iceland imposed restrictions on its currency after the crash of its three largest banks plunged the nation into the worst recession since World War II. The controls are preventing pension funds from investing abroad and have led to a doubling of the main stock index and pushed the GAMMA index of Icelandic government bonds up almost 70 percent since the end of 2008.

“There’s a risk of a bubble, whether or not you’re a pension fund or something else, when you’re locked inside some sort of a system,” said Jonasdottir. “There’s a much, much greater risk of a bubble than if the system is open and free. Of course one is considerably worried about this and the limited investment opportunities.”

Iceland’s government is looking for ways to remove the capital controls without harming the economy. They’ve hired economist Anne Krueger and JP Morgan Chase & Company to advise them on the matter.