Iceland curbs forex outflow in bid to revive crown

(Recasts, adds central bank statement, comments)

REYKJAVIK, Nov 28 (Reuters) - Iceland's parliament passed legislation on Friday to curb currency outflows and the central bank vowed to restrict credit as authorities moved to restart trade in the collapsed Icelandic crown.

"The bank will maintain tight control over the access of banks to central bank credit until exchange market stability has been achieved," Sedlabanki said on its Web site.

It said temporary currency restrictions, which had been necessary for Iceland to function at a basic level, would be lifted in stages.

"A considerable proportion of crown-denominated securities are owned by foreign investors. Lifting restrictions by stages will make it possible to unwind their crown-denominated positions in a systematic way, as the external balance permits, without undue impact on the exchange rate."

Sedlabanki said it was not possible to rule out a drop in the crown after restrictions were lifted but that any depreciation would be short-lived.

"It is not assumed in advance that the central bank will need to intervene in exchange rate developments either by raising the policy rate or by selling foreign exchange. However, this cannot be ruled out," it added.

The central bank's chief economist told Bloomberg News that Iceland could move to a partial free float as early as next week. Sedlabanki's Arnor Sighvatsson expected a "managed free float hopefully shortly, probably next week".

Following the currency legislation, which was proposed Thursday night and passed early on Friday, the central bank issued a statement explaining the new rules.

Anyone acquiring foreign currency must use a local institution and deposit those funds domestically. In addition, the following was now prohibited:

-- trading between domestic and foreign parties in domestic securities and other crown-denominated instruments

-- purchases by foreign parties of crown-denominated securities through domestic parties, unless they already own crown assets that could be used for this purpose

-- issuance by foreign parties of securities in Iceland

-- investments by domestic parties in foreign securities

-- foreign borrowings, provision of guarantees to foreign parties and derivatives transactions unrelated to trading of goods and services

-- loans granted by domestic parties to foreign parties.

The central bank had been conducting special currency auctions so that importers of essential goods -- such as food or medicine -- could obtain euros and conduct business.

The central bank's currency auction rate, last at 182.5 crowns per euro, compared with much weaker rates of 270 or more per euro in the offshore market.

Iceland earlier this month secured a $2.1 billion loan from the International Monetary Fund, plus billions more in loans and credit arrangements from several other European countries. It is expected to use those funds to get the crown trading again as quickly as possible.

(Omar Valdimarsson via Stockholm newsroom; editing by Tony Austin;

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