The Supreme Court of Iceland‘s ruling has thrown the Icelandic household debt pickle into an almighty pickle-feast.

The Court ruled that the currency loans which many Icelandic housholds had borrowed at their chosen financial institution for car loans and mortgages were illegal. According to Icelandic law, it is illegal to tie loan contracts to indexes such as a currency index. Still for the best part of the past decade, this is exactly what all Icelandic financial institutions and a large part of the public did.

While the krona was strong, it sure paid off. Interests were much lower than anything on offer through the consumer price-indexed loans available in the krona. But when the krona halfed in value in one year the loans naturally doubled, leaving many people unable to meet their payments. The government‘s unvillingess to take charge of the problem left many people in situations where their cars and homes were repossessed or they were constantly barraged with collection letters from their banks threatening bankruptcy.

So you would think that the people who suffered this terrible fate would be relieved with the Court‘s decision. But no, now they are demanding, on the back of the verdict which implies that other parts of the loan agreements are still valid, that they should keep the interest rates promised with the foreign currencies.

This would mean that not only would they get rid of the mountain of debt which has been hanging over their heads for the last couple of years. They would also hold loan agreements carrying rates which have been absolutely unavailable to regular citizens in Iceland for a long while. They would benefit greatly from these contracts.

There are many who have pointed out that this is obviously unfair for several reasons:

1) That people should not be able to pick and choose the clauses which are purely beneficial to themselves when two parties make a contract, any more than financial institutions should.

2) That the financial institution would obviously never have entered into an agreement at those rates in the first place and by enforcing those rates on them they are being treated unfairly.

3) That the currency loans were supposed to be the risky option available in the consumer loan market in the years they were taken. Surely people were only told to expect fluctuations between 15-30% but they were supposed to gain on the lower interests in turn. A huge majority of people elected the (still grossly unfair) less risky option of krona mortgages and car loans tied to the consumer price index as their income was in the same currency. Yet again, the risk takers are rewarded in the Icelandic economy.

Those who borrowed in the foreign currency obviously see things differently. Their point about the financial institutions being the experts who should have known is spot on. And their rage against the financial machine is completely understandable after the tough stance the financial institutions have shown against the households in trouble. But their claims of having been the responsible borrowers by staying away from the krona loans are at best hollow. Sure there were many people lured into these ridiculous loans by car-salesmen trying to make a deal. But there were many as well who made well considered decisions before jumping aboard and should have known the risk. Do not attempt to convince me otherwise, I worked in a retail bank division between 2004-2008 and I heard some of the customers demanding to get those loans and boasting afterwards that their mortgage was declining so rapidly. I know of cases where banks pushed these loans, I also know of cases where the customer pulled all possible strings to get them. I know several cases personally where people fully knew the risks, yet decided to take these loans. None of them complained over these loans before October 2008.

It is obviously astonishing that after the popularity of the currency loans that they were illegal and the criticism of the government that was and its supervision authorities is wholly justified. But there is grave danger hidden in these loans being made to stick at the ridiculously low rate so that a certain group in society benefits on the plight of others, even if those others are the unpopular financial institutions. We need to get rid of unfair contracts, not encourage them while ignoring a bigger picture.

The Central Bank and Financial Authority have instructed the financial institutions to use the Central Bank’s rates, without CP indexation. But the fair step would be for all of these contracts to be turned into consumer price indexed krona loans, except for those who could realistically have been taken originally without. What people have overpaid or lost should be reimbursed. Any excess damages should be settled by arbitration or the courts. Borrowers should then take the fight to the government and demand a viable solution for the future. For now such a solution would be demanding that Iceland turn towards the EU. The Social Democrats have brought that to the table already and membership and eventually becoming part of the Euro would see enormous benefits for the nation‘s households.

If the other parties have any credible solutions they should put them on the table immediately instead of goofing around their broken ideological carcasses. Icelandic borrowers and households deserve something better than the demagoguery provided by the Independence Party, Left Greens and to a lesser extent the Centre Party at the moment. The reason people took to the illegal currency loans was simple. The Icelandic krona is unable to provide its citizens with financial security. Its side effects are astronomical interest rates and intolerable fluctuations.

There is a risk associated with the low interests being allowed to stand and the borrowers benefitting from them. They can not be allowed to walk away scotch free without a care in the world for the broken system that needs to be fixed. And believe me, I know some people who carried such loans, were set free because of connections at the banks and afterwards could not care less for the rest of their fellow citizens‘ plight. Together all borrowers must take a stand against the injustice of the consumer price indexation which drove so many towards the illegal loans. Asking for rates unavailable to everyone else is akin to profiteering from a disaster.  In all fairness, uniting and taking a stand once and for all would be the right thing to do.

Related posts:

1. The Currency Loans Were Legal – The Dark Side Of The Government’s Inept Solutions
2. The Currency Loans: Iceland’s Great Shame
3. Loans of the Icelanders
4. FT: EU eyes foreign currency loan penalties
5. State Owned Banks Gearing Up For Competition