Comments on: The Icelandic Banks Question of The Day

By: Blubber

Blubber — Sun, 15 Nov 2009 13:32:30 +0000

VA: That makes sense, you’re likely right.

By: Vilhjalm A.

Vilhjalm A. — Sun, 15 Nov 2009 10:34:09 +0000

And there was another important news about home-loans that did not get the attention it deserved.
An IMF report in the past several weeks indicated that the total book value of Icelandic home-loans and other household debt should be written down to its fair market value, from about 1700 billion ISK to 1150 billion ISK, a difference of 563 billion ISK, about a 33% reduction.
Has this reduction already been taken? Where does this money come from — who takes the “loss” on this write-down? If the loans have already been written down by the banks and other mortgage originators, why are Icelandic mortgage-holders still paying full value?
At first it looked like the IMF was merely suggesting that the debt SHOULD be reduced to fair value (see the article on Silfrid and Marino Njalsson’s blog). But according to an article in Vidskiptablad, the new business banks have already received the home-debt from the old banks at a 44% discount!
(See http://www.amx.is/vidskipti/11392/)
Does this mean that the other holders of household debt (New Glitnir, New Kaupthing, New Landsbanki and the pension funds) have already received a 33-44% discount on the debt they took over from the old banks? If that’s the case, why don’t they write down the debts to FMV for individuals?
In theory, if the Emergency Law is valid, the 560 billion ISK “loss” should fall on the foreign creditors, who own the old banks.
If the Emergency Law is not valid, then the old and new banks are one and the same and no write-off has really occurred, except in a book-keeping sense. But if that’s the case, why have the (unnamed) business banks received a 44% discount on household debt they got from the old banks? Wouldn’t that be yet another financial scandal?
These household debt figures are interesting for another reason, since they show what the actual cost would be to write-down household to individuals to fair value– 600 billion for a 33% reduction.
Yes, 600 billion is a fair amount for the government to pay, but it would allow a large portion of the drowning Icelanders to stay afloat, and in the larger picture 600 billion is not much compared to the already large Icelandic national debt (anywhere from 2000 to 4000 billion ISK, depending on how you count). Is it worth 600 billion to stop 50000 Icelanders from emigrating?

This issue of debt-write off is fairly complicated since it involves the status of the old vs. new banks and the Emergency Law. But at the very least the government should try to explain whether a 560 billion write-off has already occurred and why this discount is not passed along to individuals. Is the government ever going to explain to its citizens what it doing with the old and new banks and whether the Emergency Law will hold?

The only rational explanation for the government’s action goes something like this:
The government wants the foreign creditors to take over New Glitnir and New Kaupthing, for two reasons. First, it would save the government the enormous cost of having to pay off all the debt of Old Glitnir and Kaupthing, and two, it would guarantee that Icelandic savings accounts (about 1800-2000 billion ISK total) would be preserved.
In order to entice the foreign creditors to take over the two new banks, the governments is giving the banks the household debt, which is the main item of value in the banks (the loans to Icelandic businesses are not worth much). The new banks would own the debt at write-down value, but could collect (or try to collect) at the full nominal value of the loans. In other words, the foreign creditors get to squeeze individual Icelanders for as much as they can, in exchange for taking over the new banks and all their liabilities.
I suppose that this is not a bad plan, but it really means throwing the Icelandic mortgage-holders to the wolves in order to save the savings-account holders.

By: Bromley86

Bromley86 — Sun, 15 Nov 2009 09:35:34 +0000

The interesting thing in all this is that the government has found itself facing lower levels of debt than it might reasonably have forcast at the start of the year.

It might have been a reasonable position to take back then that it just could not afford to borrow the money to support comprehensive debt relief, but not necessarily now.

By: Vilhjalm A.

Vilhjalm A. — Sat, 14 Nov 2009 15:55:16 +0000

About that Bank of America offer: This shows that banks will only deal fairly with homeowners when the homeowners have non-recourse loans (i.e. the ability to leave the keys and walk away from the house) or bankruptcy courts have the ability to modify home loans (called “cramdown” power — it affects housing prices throughout the system, not just those in bankruptcy). Icelandic homeowners in contrast have nothing to bargain with — it’s take it or leave it, oh wait a minute, you CAN’T leave it because there’s nowhere for you to go!
Even that BoA offer was not very good, the bank still wanted more than FMV. After foreclosure costs are taken into account, BoA would not have made more than $270-280,000 on reselling the house, vs the $334,000 that they wanted.

There seems to be something peculiar going on with the Icelandic “debt relief” program. When the plan was first suggested, the government said that it would buy all the mortgages from banks and pension funds and put them in the Iceland Home-Loan Fund. Now that part of the plan has apparently disappeared. That part was important because it would allow the distressed homeowners to act as one group rather than negotiating separately with the individual banks, plus the government would have to reveal data about this group of homeowners. Generally homeowners would be much more likely to get a write-off of unpayable debt if the Home-Loan Fund owned thee mortgages rather than the secretive and profit-seeking banks.

And today there was an article that indicates that the banks are trying to get homeowners to sign mortgage-extensions that are much longer than the three-year period of the government plan, as long as 20 years, and then telling the customers who sign, that really, this is only a three-year extension. This smells bad.
http://ruv.is/heim/frettir/frett/store64/item311800/
This whole plan in fact smells bad. It offers little, and adds an enormous element of uncertainty.
When private companies get debt relief or write-off, they get it immediately and permanently. This is because the business world needs “certainty”. But if individuals get debt relief, they do not know if it’s permanent or not – maybe you have to pay it back, maybe you don’t.

Another news article indicated that there was something like 34000 families (it’s not clear what is meant by family – let’s say 50-70000 people) have serious or unmanageable debt, while the rest of the population doesn’t have a debt problem. The – unspoken – assumption of the government and bankers (who are now the same, it appears) is that these 50-70 thousand people are to be left to sink or swim, the government/banks are not going to help them very much at all. These 50-70000 can work it off, leave the country, or become debt fugitives and move back into their parents houses. Darwin is the operative economic theorist in Iceland, not Keynes.