Iceland has decided to exit capital controls arising from its 2008 crisis, but its plan sounds disturbingly familiar to any Argentine economist (I am one).
The government in Reykjavik has passed a law that presents foreign holders of its currency with a coercive choice in exiting the current trap -- either take a below-market exchange rate or see their assets forced into a locked, non-interest bearing savings account whose terms deteriorate over time. Only foreign holders are subject to this treatment, a form of discrimination, and by doing so Iceland will be copying from the sovereign debt strategy that Argentina followed under two previous governments following its 2001 default. It was a very costly and ultimately failed decision for my country, and Iceland needs to understand the dangers of following it.
Demagogic politicians in some countries always seem to think only of the short term benefits of such policies and don't take into account the enormous cost that comes with the destruction of confidence, which is difficult to recover.
The word "credit" comes from the word "credibility" and when you lose it, you also lose financing and investment. There is no way to maintain sustained growth in an economy and the well-being of your society without fluid access to the international financial markets.
One only needs to look at Argentina's bad example. Nobody would lend to our country for over a decade after the 2001 sovereign debt default. But for most of that time, our government officials insisted it had nothing to do with confidence; it was that the global markets were "conspiring" against the country. The argument was that if they'd written down Argentina's macroeconomic data on paper and presented it to an analyst without saying which country it was from, he would surely say to lend that country money. The reality was that when the markets heard "Argentina," there was no conspiracy; they simply remembered how the country had treated its creditors, first by defaulting and then offering the same discriminatory treatment Iceland is preparing to adopt as a state policy.
The causes of this mistrust with Argentina can be summed up this way. Suppose I told you I knew someone who had a circumstantial need for liquidity and needed a small loan with respect to the enormous size of his assets and the fortune he possessed, and that he's prepared to pay a high rate of interest. You'd probably seriously consider making the loan. However, if upon hearing his name you realized he's a well-known swindler, you would immediately say no to the financing.
That's the history of Argentina. In previous years, and on several occasions, the country pilfered the confidence of those who lent it money and, with capital controls, it swindled local and foreign investors alike. A U.S. court ultimately ruled that Argentina had passed a law in 2005 that discriminated against creditors who didn't accept its restructuring plan, but the country defied the ruling after voluntarily submitting its sovereignty to it in order to obtain the financing in the first place. This is why Argentina faced the second largest drop in institutional quality in the last 13 years, to No. 142 out of 192 countries on an index compiled by Fundación Libertad y Progreso-RELIAL, because its government systematically broke laws, international treaties and its own National Constitution.