Iceland says it has reached a deal to buy krona-denominated assets held in Luxembourg, reducing the country's external debt by more than 3.5 percent of gross domestic product.

Iceland's central bank, Sedlabanki, says under the deal with Banque centrale du Luxembourg and the liquidator of Landsbanki Luxembourg SA — the local arm of the collapsed Icelandic bank — it will buy bank bonds pledged as collateral for a liquidity facility provided to Lansbanki in 2008.

Sedlabanki Governor Mar Gudmundsson says the agreement will aid the removal of capital controls that were put in place in the Nordic country during the financial crisis.

Iceland is trying to gradually remove the controls — while attempting to maintain the value of the krona.