Turns out that the currency loans which have rocked Icelandic society for years were illegal after all. Of all the royal mess created and sustained by the Icelandic political elite, the whole affair ranks amongst the absolutely worst. On the ground level amongst the public, lives have been lost, future plans have been destroyed, people have lost their livelyhoods and driven into unneccesary bankruptcy.
But why did all those Icelanders take on these risky loans? Simply put, the Icelandic krona has been walking dead since early last decade when the Central Bank decided to implement inflation targets on the miniscule floating currency. As the government proceeded to fulfill all its campaign promises in a couple of years as Geir Haarde was quoted saying, the ever rising interest rates attracted an influx of hot money which created an illusion of wealth, fuelled speculation and a bubble economy to rival all bubble economies.
Ordinary Icelandic consumers soon felt the pinch when the rising inflation started morphing their consumer price indexed loans into double/triple repayment monsters. It started to make sense borrowing in dependable currencies like the Euro, US dollar or the popular basked of Yen and Swiss Franks. The interest rates there were unheard of in Iceland and unavailable to ordinary citizens. That is until every bank in sight begun offering them around 2004-2006. The appeal was obvious and although most consumers balked at the risk involved in paying off their car-loans and mortgages in a currency different from the one in the one they were earning, many jumped on board. The krona would never fluctuate more than 15-20% would it and it would still be worth it?
Well, no…and the consequences were disastrous…
from M5.is. Click to enlarge
Astthor Skulason, a farmer paralyzed below the waist needs special farming machines and equipment to run his farm. “It looks like I have paid them much more than I borrowed”, he said talking to DV.is about Lysing, the financing company which still repossessed the machines. Astthor says the machines not only help him out with his work, but also provide him with much needed exercise as he tries to live with the handicap which he got from a car accident in 2003. An intervention and a collection on behalf of a couple of MP’s managed to allow him to keep his farm equipment.
Curiously, after the economic collapse voices started being heard about the supposed illegality of the currency loans. That was a new and unexpected angle, not heard while consumers were enjoying the benefits of the foreign interest rates. But now they had doubled and suddenly there were entities sprouting which had been unneccessary in the previous years of milk and honey. The Houshold Alliance and Borrowers Alliance as well as the office of the Consumer Spokesman claimed that it was illegal to tie payments of capital in Icelandic kronas to a different currency. This could not possibly be? Yet that was what happened when such a case hit the courts. The financial product had been illegal all along.
Currently the discussion has been about what minister of economic affairs, Gylfi Magnusson said or meant in Althingi last year when he seemed certain that the loans were in fact legal. The government had in fact sold off a couple of banks (Glitnir and Kaupthing) and taken majority ownership in one (Landsbankinn) based on such an opinion. It then turns out that his ministry and the Central Bank all sat quiet and acted indifferently on legal advice which claimed the loans were illegal. The government stood idly by when people‘s lifes were torn apart becaue of these loans. The fortress promised for the households became the banks‘.
Even more curiously and telling of the political cesspool that is Iceland anno 2010 is that the MP‘s and media calling for Gylfi‘s head on a plate did not raise an argument with his stance at the time. The nerve of the Independence Party knows no limit as they call for Gylfi‘s resignation when lead by failed Central Banker David Oddson and bailed out businessman Bjarni Benediktsson.
In fact, the political elite and Althingi‘s collective shame is all the greater considering that former minister of commerce and industry Valgerdur Sverrisdottir of the Centre Party has stepped forward and claimed that she knew all along that the loans which just about all financial institutions in her nation were making were illegal!
Did you get that? The minister responsible for the banks in Iceland working properly turned a blind eye for nine years on them selling an illegal product which at worst in many cases ruined people‘s lifes or at best changed them completely. She even sponsored a bill in 2001 where it was made clear. The members of Althingi‘s economic committee which should have discussed the bill at the time included Johanna Sigurdardottir, now PM for the Social Democrats and Margret Frimannsdottir who at one point was the party‘s vice chairman, Ogmundur Jonasson, now Left Green xenophobe, Kristinn H. Gunnarsson and Hjalmar Arnason from the Centre Party, the former who has written inspired columns about the potential damage the banks would face if the loans were deemed illegal. The Independence Party had four representatives on that committee, including corrupt Kopavogur mayor Gunnar Birgisson, Fisheries minister to be Einar K. Gudfinnsson, Sigridur A. Thordardottir and the current chairman of the Confederation of Icelandic Employers Vilhjalmur Egilsson.
Where have all these people and all these political parties been sticking their heads for the last decade?
A truck driver in his sixties, Olafur Jon Leosson took his own life in October 2009. Olafur had not been able to make payments of the currency loan he had taken with financing company Lysing to finance the purchase of his truck. Olafur left a letter to his family where he claimed unemployment and debts had left him with no other way out. A big source of desperation was that his good friend Nathaniel B. Agustsson had signed a guarantee for his loans. “He obviously feared that I would be in trouble because of this. He was really affected by being unemployed for a long while and I could feel how the worries were breaking him down”, said Nathaniel to newspaper DV. Ten months after Olafur‘s death, the Supreme Court of Iceland ruled that the loans had been unlawful. Olafur‘s son Gustaf commented to DV that things might have turned out differently for his father if the ruling had come earlier. “The top managers of these companies knew this. It just has to be. When you run a company you have to be clear about what you can and can not do”.
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Silvia Planchett
1 year ago
Valgerður also considered Fjarðarál a blessing. This is one of those times when you really wish that that there was a hell for these parasitic politicians to go to!
Michael Schulz
1 year ago
Excellent piece. Keep going. It is being read and discussed even if it doesn’t always show. Cheers, Michael
Knute Rife
1 year ago
Here is a post I made on Iceland Weather Report when the decision came down:
When Alcoa started throwing money, the economy heated up real fast, and the government had taken no steps in anticipation of it, since the Independence Party loves its Austro-Chicago Economics Kool-Aid. To head this off, the government jacked rates, which created an enormous arbitrage spread between ISK and the rest of the world, since everyone else was desperate to hold rates down. Financial players were looking for ISK paper the way a junkie looks for a fix. That’s why the loans were denominated in ISK even though they were pegged off shore: The lenders wanted the paper to play the spread, occasionally to hold but typically to flip on the secondary or derivative markets.
There were just two, teeny tiny problems with this financial nirvana. First, arbitrage spreads always close. This one slammed shut in dramatic fashion. Second, as the Supreme Court has now pointed out, the interest calculation on these loans is illegal, since ISK loans require ISK-based interest calculations. This would have defeated the lenders’ purpose, though. They didn’t want Icelandic paper; they wanted ISK paper. They knew what they wanted, they took the risk, and they wrote the loans accordingly. And they got away with it, at least for a time, as the government viewed “regulatory enforcement” as being on par with “baby rape” (and it was far from the only government to hold such an attitude). But that was then, this is now, and the piper must be paid. Those loans must be rewritten.