Iceland Puts Freeze on Foreign Investors

A growing number of fund managers are now buying Icelandic government bonds, including those that were marooned on the island when it applied capital controls. The country is now one of the few offering a combination of high interest rates and strong economic growth prospects.

Eaton Vance and another holder of the legacy debt, also called "offshore" debt, hedge fund Autonomy Capital LP, have been courting the government for months to allow them to keep their cash on the island, even offering to swap their holdings into long-term bonds that they would pledge to hold on to.

But the country isn't interested. Instead, officials behind the law say they aim to keep the $16.7 billion economy of the island with a population of 327,386 from being swamped anew by the ebb and flow of offshore funds.

"We don't need the money," said Mar Gudmundsson, governor of Iceland's central bank. "These are remnants from the last boom and bust, and we are not going to repeat that mistake."

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Some investors consider the terms to be coercive and tantamount to default. But Kristin Lindow, a sovereign bond ratings analyst at Moody's Investors Service, calls the offer purely voluntary and says most bonds will mature years from now, when capital controls will likely be long gone.

... The economy is thriving again, thanks largely to a tourism boom. But the populace wants the controls fully lifted. "Capital controls should have been lifted a long time ago," said Arnar Sigurdsson, an importer of French wines in Reykjavik who invests his personal wealth in bonds and currencies.