Iceland is picking up the pieces of its shattered economy following the 2008 collapse of its top banks and crown currency at the height of the financial crisis. It has boosted reserves and focused on improving liquidity as it prepares to lift foreign exchange controls and return to global capital markets.
Iceland's central bank, the Sedlabanki, said in a statement the three-year deal amounted to 3.5 billion Chinese yuan ($512.8 million), or 66 billion Icelandic crowns, and could be extended if both parties agreed.
The deal is similar to previous bilateral agreements the north Atlantic nation reached with its Nordic neighbours as the island weathered the worst of the financial crisis.
'Any news of improved currency liquidity in foreign currency is positive for the central bank and for the coming liberalisation of the capital markets. This must be seen a positive step,' said Jon Bentsson, an economist at Islandsbanki.
Iceland introduced strict capital controls to stem a massive outflow of funds and has been gradually easing those restrictions in an effort to get its economy back on normal footing.
The currency swap deal with the People's Bank of China should be a further boost for hard-hit crown currency, which has been recovering in line with the island's emergence from its deepest-ever recession.
'It just improves confidence that the central bank will not likely have liquidity problems, even if we have volatility in currency flows to and from the country,' Bentsson said.
Since December 2008, China has broadened the influence of the yuan by arranging six swaps, totalling 650 billion yuan, with South Korea, Malaysia, Indonesia, Hong Kong, Belarus and Argentina.
These allow importers to pay for Chinese goods in yuan instead of dollars.
Analysts see this as a way for China to get comfortable with the internationalisation of the yuan before potentially moving towards capital account convertibility, something that could eventually allow the unit to become a reserve currency.
Iceland's economy continued to inch out of recession in the first quarter, data showed this week.
Aid from international lenders has started to flow, exports have been rising and interest rates have come down to 8.5 percent from crisis levels of 18 percent.
(Additional reporting by Alan Wheatley in Beijing) ($1=127.60 Iceland Krona) ($1=6.825 Chinese Renminbi) Keywords: ICELAND CHINA/ (Reporting by Mia Shanley; Editing by Ron Askew; mia.shanley@thomsonreuters.com; +46-8-700 1004) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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