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”.

Related posts:

1. The Currency Loans Were Legal – The Dark Side Of The Government’s Inept Solutions
2. In All Fairness: The Currency Loans And What Now
3. The Benefit of The Doubt

Hundreds of protesters have gathered since noon protesting against the Central Bank’s and Financial Authority’s recommendations on how to deal with the currency loans, recently judged to be illegal in the Supreme Court. There clearly are some big issues still unresolved in Iceland.

Related posts:

1. Hands on approach by the Central Bank
2. 365′s against the protesters
3. Police fighting protesters in Reykjavik

They are talking about the currency basket loans.

I agree with them.

But I have also heard a lot of Icelanders, and in some cases the same people who maintain the above, that Dutch and British consumers should only blame themselves for acting as irresponsible rate tarts when saving with Icelandic internet accounts such as IceSave.

This is confusing to me.

Hopefully we can agree that consumers should benefit from doubts because they are not financial experts, even if they are foreign.

Related posts:

1. A slap in the face for loyal customers
2. How Bad Are Things Really? You Don’t Want To Know.
3. Economist: Like Little Hedge Funds

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

Most things indicate that the politicians decided to fool the public by stalling for as long as possible. To issue statements which provided temporary hope, but turned out to be nothing but a longer nooze.

Let’s be clear about one basic thing: currency loans, paid out in Icelandic kronas are absolutely illegal and consumer price indexed loans are both morally wrong and against the laws on natural ways of doing business. Individuals who have been entangled in this net of debt and ask for correction are not asking for pity or special favors. They are simply asking for the laws of the country to be followed. The question is really about whether we live in a country which follows the rule of law or in a banana republic.

In the 36. article in laws number 7 from 1936 it says “A contract can be set aside on the whole or in parts, or change if it were deemed unfair or against good business practice”.

In the same laws it also says, “A contract is deemed unfair if it is against fair business practises and skews the balance of rights and responsibilities of the parties, against the consumer”.

The law is clear and a recent ruling in the favor of a financial institution in the District Court of Reykjavik only shows how the co-insurance of those who hold the reins of power has reached intolerable heights and that justice in Iceland has no relation to the systems of the countries which we want to compare ourselves with. The word “banana republic” comes to mind again, but what can you expect in a country where the servants of the judicial branch are without exception chosen according to political measures.

The consumer price indexation of loans is one of the biggest crimes in recent times. In the decades before 1980 there was anarchy in the Icelandic financial market. Inflation grew rapidly and the ruling elite either did not understand what was going on or didn’t want to. Instead of using realistic solutions, for example to halt the lending of the banks with higher reserve requirements, the system was put on auto-pilot with the consumer price indexation. This was a tactical acknowledgement by the ruling elite that they did not know how to control the economy.

The consumer price index is illegal because it is not in the spirit of normal ways of doing business. How can it be justified that only one party is liable for all the risk of everything that can go wrong in the future? When the banks offered people consumer price indexed loans in the years before 2008, the “experts” from the banks provided payment plans which indicated a 3-5% inflation in the next few years. This makes the terms of consumer price indexed loans void because laws on confidentiality and respect in contracts state that it is illegal to use a contract because of things that were supposed to be but are no longer applicable.

The fact that the financial sector itself ruined the country and drove the currency down into the mud with the accompanying inflation emphasises the illegality of consumer price indexed contracts.

In short, the financial sector ruined the economy and is fully responsible for consumer price indexed loans having risen rapidly and currency mortgages doubling. And now the same system kicks people while they are down and demands that they not only pay the extortion, but keep paying for houses and cars they’ve already taken from them. This is the most outrageous shamelessness of all times. It should be a primary demand that people who walk away from assets that are loaded with debt are free to go. The members of Althingi who stand in the way of this change have frozen hearts and are not human beings in the common understanding of that term.

The elite which has made its bed in the fortress and thrown people out gets away with its dark magic in the shadows of secrecy which has plagued Icelandic public administration for so long. Even if the assets of tens of thousands of Icelanders have been taken away, the secrecy and co-insurance continues. Where exactly are the lists of all the politicians who received bullet loans and other unusual benefits from the criminal gangs which bankrupted the country? Why can’t the people who have to pay for the crime not get concise information about the write offs in the banks?

Icelandic politicians have the tendency to behave like Danish bureaucrats around 1900. As a class, they are un-democratic and arrogant. They don’t hesitate in keeping away the most important information away from the people. Energy prices to foreign companies, something which has to do with all future construction of the country, are secret. Old contracts with the World Bank and the IMF, which shaped the industries of Iceland for decades are also secret. Remember that the government originally wanted Althingi to approve the IceSave agreement without reading it over. Everything else is of similar vein.

Much needs to be changed if people really mean to resurrect the country. The old secrecy must disappear and the buraucracy must be shaken to the core. The options are simple. Either we have a totally changed system where new brooms sweep out the corruption … or disaster of huge proportions. The livelyhood of the public cut down and massive exodus. People’s sense of justice has been abused as far as it is possible.

If the government continues down the same road then we have an altogether worse Iceland coming in a few years. Oppressionary interests, unreal payments of foreign debt and unemployment will cause even more bankruptcies and more complex difficulties. This is an untolerable vicious circle and a development which must be stopped. The knot must be untied by removing the price indexation of loans, change the currency loans into Icelandic Kronas on the price they were at 15 months ago and drive the Central Bank interest rates down.

Oppressionary interest rates are evil. While most businesses in the Western hemisphere have access to cheap money, which they need in these times of recession, wounded and dying businesses in Iceland have to pay more than a third of their turnover in interest rates. Only economists suckling from the state would think of defending such a suicide mission.

This might be understandable if some economic policies were being tried out here for the first time, but decades of experience have shown us that the oppressionary interests do not work. They ignite the flames of inflation in a small economy because competition within the state is too small. The oppressionary interest rates do not support the currency either. They only let the world know that there is something terribly rotten in the state of Iceland.

Fifteen months after a few criminals, with the help of the political elite, ruined the lives of tens of thousands of Icelanders, the state prosecutor came alive and prosecuted a bunch of youngsters for attacking the Althingi building. This is a nightmare and with it comes a certain danger. When people have to fight windmills, continually wrestling with a Kafka-esque course of events, there is a real danger of them losing their will. That can never be allowed to happen.

Let’s be clear that most all progress is made when people conquer certain difficulites, and it is almost natural that all troubles create opportunities.

An old Chinese tale tells of a farmer who owned a horse, which ran away from home. When the neighbors came to offer their condolences the farmer asked “how do you know this is bad news?” The neighbors shook their heads and left but the next day the horse returned with a wild horse. Now the neighbors arrived to congratulate the farmer but he looked at them bewildered and asked, “how do you know if I have been lucky?” A bit later the farmer’s son was taming the new horse which threw him off and he broke his leg. The neighbors returned yet again to offer their condolences and again the farmer said “how do you know that this will turn out badly?” The neighbors left speechless but the next day a warlord came by the territory and gathered round all the young and healthy men available and sent them to war.

The banking collapse has given us a golden opportunity to create a better society. We have tolerated for too long an incorrigible executive power, a limp Althingi and a judicial system which is political to the core. If we stand together then the elites will lose their grip of the system and we reap a better society, a more just society, a country of which we can be proud.

Related posts:

1. Prisoners options
2. Loans of the Icelanders
3. Inflation At 16%

The District Court of Reykjavik yesterday declared that the borrower of a currency loan was responsible for paying his loan fully, even if it had doubled in one year. The Court really had few other options, the agreement between lender and borrower is one where the bank lends foreign currency and it was the customer’s choice whether to take that option or one of a loan in ISK.

So much for the imbalance between the lender who is supposed to know more about finance and the borrower who is not an expert.

The Courts and society has determined that Iceland is a country built for banks, not people.

This probably means that all those who have been waiting to hear about the outcome of this court case and have loans in foreign currency can say goodbye to their former lives. Tens of thousands of Icelanders are going to become bankrupt or heavily strapped.

Meanwhile, us who didn’t take the risk of currency loans even if they were offered are also being thrown to the wolves. What choices did we have? Not choices similar to people in countries around us of loans that go down as you pay.

Force majeure anyone? Is it unfair to compare the financial collapse of Iceland to anything but a natural disaster, an extraordinary event?

Meanwhile the governor of the Central Bank has assured Icelandic MP’s that even if the IMF has come out and said that Iceland’s debts were even larger than 310% of GNP, then it is OK because included in that number are all private foreign debts which are going to be written off, making the picture much brighter.

So the government, the banks and the largest companies will all see write offs that they will not grant to their citizens themselves.

A tragic story has emerged of Olafur Jon Leosson, a roughly sixty year old truck driver who bought himself a new truck on a foreign currency loan when jobs were everywhere for him to put it to use. Then the jobs started disappearing, and then the currency dropped. He tried to negotiate with the banks, the financing company Lysing, everything. He took his own life recently as he had found the door shut everywhere.

Great is the shame of the government, Althingi and the financial institutions. Did they ever read Grapes of Wrath?

Related posts:

1. In All Fairness: The Currency Loans And What Now
2. The Currency Loans: Iceland’s Great Shame
3. Loans of the Icelanders

From the Economist

A relevant piece on the foreign currency mortgages debate in Iceland.

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He confirmed that the Commission wanted to introduce “specific and penal” capital requirements on lenders to prevent the granting of excessive loans to private households when these are denominated in a currency other than that of the borrower’s income.

From the Financial Times

Rhyming with what I’ve said before, banks have an unfair advantage over regular customers when it comes to negotiating the rates of mortgages and loans. Reason enough for customers to be allowed to renegotiate or walk away.

Related posts:

1. In All Fairness: The Currency Loans And What Now
2. The Currency Loans Were Legal – The Dark Side Of The Government’s Inept Solutions
3. Iceland looks to restructure $3.6bn of foreign-held debt

Atli Steinn Gudmundsson, a journalist at visir.is and Bylgjan stopped paying off his mortgage in March. “I would have to be a CEO of a large company to manage all those payments. It came to the point where I saw no sense in continuing to pay” he says to DV.is today.

Atli’s original loan was for 17 million ISK, but taken in foreign currency. Now it is 40 million. Interest payments have gone from 63 thousand ISK up to 130 thousand. He now has tenants in the apartment, and that prevents him from getting the loan frozen.

Gunnar Sigurdsson, director is a generation older than Atli but has taken the same decision. “My next step is to stop paying. I have paid tens and hundreds of thousands a month because of loans for several years. The only thing that happens is that the loans keep rising and rising. When I sat down and started adding things up, I reached the conclusion that I can just as well stop paying”.

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A storm is brewing in Iceland. Homeowners have waited since October for words from the governments of Geir Haarde and then Johanna Sigurdardottir on how the state is going to tackle their problems. 

They are still waiting and they are getting angrier every day. 

The thing is that pretty much all home loans in Iceland have become subprime loans in less than a year. If you have invested in a home in the past decades then you have had two options: 

a) A price-indexed loan in Icelandic Kronas. 

- Back in the eighties the government had battled a massive inflation and decided to implement price-indexation on loans. 

- This was done to protect the owners of capital, in effect lenders from losing their money if they lent it to someone else. 

- The price indexation has the effect that if the consumer price index rises then the capital of your loan does so as well, and so do your payments. So a 5% annual inflation means that your 10 million krona loan grows to 10.5 million. 

- Nothing on the other hand was done to protect borrowers from inflation. They still received their wages in an ISK that wasn’t price indexed, so they in fact suffered a double loss on the inflation rising. The rising cost of the loan and the shrinking purchasing power of their wages. 

- This created an unbalance in the economy, whereas the banks and lenders were said to have both a belt and suspenders to keep their pants from falling down. The costs of inflation were effectively transferred to wage-earners and borrowers.  

- Now you could technically still get loans that weren’t price indexed but you should have tried asking your bank for one. Fat chance, they were in a position to direct you solely to price indexed loans.  

- The intent of the price indexation was to protect people’s savings. What it ended up doing was create an environment where lenders and borrowers did not share a common interest in doing everything to suppress inflation. With money flowing into the economy and overheating, the banks should have stopped lending money a lot earlier than they did. They didn’t because they kept receiving payments while things were good and it didn’t matter how much they charged. 

- Since the Central Bank of Iceland set itself a goal of inflation at 2,5% since March 2001 it has spectacularly failed. Since 2004 inflation has been on the rise from 5% up to almost 20%. 

- Anyone can see that home-prices must maintain a fantastic rise to keep up so that people don’t end up losing their home-owners equity.  

- The banks realized that they were selling a product that was fast becoming undesirable. 

So around 5-6 years ago they introduced a new and brilliant product: 

b) Currency loans. 

- Homeowners sick of real interest rates on their properties never dropping below 10% and sometimes touching 20% looked at the low interests rates offered by other currencies as their way out of the swamp.

- The Yen and the Swiss Frank were especially popular. A 50/50 combination soon proved a hit in the auto-loan market. 

- This meant that instead of paying the exorbitant rates that came with the ISK they could greatly lower their monthly payments. Why pay 30.000 when you can pay 15.000 AND your capital doesn’t rise with inflation but decreases instead? 

- There was a double gain on offer. If the ISK got stronger then the capital would decrease as well because of the exchange rate. Absolutely brilliant. 

- But there is always a catch and always some small print somewhere. If the ISK would weaken then the capital would rise accordingly. People were told that currency loans were brilliant if you could handle monthly fluctuations of 15-20%. 

- With almost no unemployment and Iceland becoming richer by the day it was a small detail. Somewhere between 8-15% of homeowners decided to risk the gamble. 

- And then the Icelandic krona’s index went from 109,7 to 251,5 in 18 months. 

The combined effect of these two natural disasters is apocalyptic. Lets say two neighbors each bought his home for 35 million with a 10 million downpayment a couple of years ago. So each took a loan for 25 million. 

Mr. A now probably owes the bank in excess of 30 million even though he paid the bank 5 million of his income from the last two years onto the loan.  

Mr. B is even worse off. He now owes between 50-60 million to the bank. If he was making payments of 150.000 per month then they are now fluctuating above 300.000. 

Meanwhile the housing market has plummeted and there are hardly any transactions taking place. The Central Bank assumes that home prices have or will decrease by almost 50% this year meaning that all loans in Iceland are effectively subprime loans. You cannot sell without assuming debt without an asset behind it. You cannot move if you want to, or what is worse, if you need to. And with thousands of apartments coming into the posession of the banks needing some cash inflow the rent market has shrunk as well, so people cannot even rent their apartments to make ends meet. 

Now the argument has been made that borrowers know the risk when seeking loans. People entered into the agreements with the banks of their own free will. That is true but in fact their choices were limited and no less important they were participating in their society. 

- Loans without price indexation were impossible to find for common people. 

- Competition was minimal. No foreign banks dared offering loans to Icelanders so the local banks were relatively hassle free.

- If everyone in Iceland had said to themselves that something was up and stopped borrowing money for homes then society would have grinded to a halt. Of course they didn’t, jobs were plentiful, the housing market on the rise and consistent propaganda from the government and the banks that people should borrow, invest and spend like there was no tomorrow. People participated in their society because they believed in it. One of the slogans from the Independence Party’s 2006 campaign was “When all is considered,  strong economic management is the biggest welfare issue”. That’s how you appease both ends of the spectrum in one sentence. Pure PR heaven. 

Since last autumn, the governments have indicated that something would be done to relieve the plight of Icelandic debtors. But there is a dilemma. 

- The state is in deep financial trouble. How deep down it really is is unknown because the cat hasn’t been let out of the bag yet. But the IMF and Oliver Wyman have used words like “largest in history”, “worst in 80 years”.

- Everyone knows that Iceland is entering extremely rough times. Welfare will be cut, taxes will rise and the state is facing an unenviable wall of debt that need to be paid off. The interest payments alone will cripple a large part of the economy. 

- Foreign debtors obviously will want as much as they can for Iceland’s outstanding debt. It will be a heavy burden for the state, i.e. everyone in Iceland for a long time. 

- So therefore it makes no sense from the standpoint of pure economic theory to cancel debts. You assume debt and pay it off. If you don’t you lose your home. That is how the world works.  

But this is still unacceptable to Icelandic homeowners. 

- Yes, they borrowed that money and some people assumed a lot of risk by borrowing more than they could chew and in currencies different from the one their wages are in. 

- But most people didn’t expect this magnitude of risk and agreed to pay their loans under drastically different circumstances. They expected (or hoped) for a lower inflation. They expected low unemployment. They expected steadier purchasing power. And they trusted their banks. 

- That was probably the biggest mistake. It appears that the owners and top management of the banks were systematically lowering the ISK to inflate their annual and quarterly reports. 

- The reason Iceland is in such deep trouble is the wrecklessness of these people who either started savings accounts abroad without care for the safety of their depositors or lent stupendous amounts of money to closely related individuals or businesses. The word on Kaupthing for example is that more than 50% of their loans were made to just 10 different individuals or businesses. 

- This is an equivalent of someone renting you an apartment, breaking in and wrecking it and then asking you to pay the damages. This is a question of fairness to the wage-earning homeowners of Iceland and being able to trust that the society you belong to punishes those who do wrong instead of letting them off the hook. 

During the election campaign, the Progressive Party introduced their plan of a 20% drop of all loans and that probably delivered them a relative gain in the end. The Independence Party jumped aboard on the idea when they were getting more desperate but most were sceptical. Everyone knows that this will be at a cost so reducing loans for businesses or large investors wasn’t appealing. 

The Social Democrats and Left Greens on the other hand rejected these kind of reductions. They have passed bills that allows people in bad situations to extend their loans but that is like putting a band aid on a person experiencing a heart attack. Also it is not transparent enough. Who gets help and why? 

It is frightful to say outloud what many are thinking. If it hadn’t been the Progressives who had put the idea forth in the first place, but someone from their own ranks then it would have been given greater consideration with the government. Party politics might still do some damage to an already crushed nation. 

Unfortunately other ideas have not been allowed to float to the top in the cesspool of Icelandic politics. I personally am intrigued by the Zingales’ Plan whereas the bank renegotiates with borrowers to drop their loans by an agreed percentage, say 40-50%. The bank in turns receives the same amount from the eventual sales profit of the home once the borrower decides to sell it. Whereas the 20% flat cut is hard to swallow for creditors, they might see an opportunity to regain some of what they are receding in the Zingales plan. 

While recommending that it be given a closer look that doesn’t mean that it could be the only or satisfying solution. What has happened in Iceland despite the nation’s current state of denial is an economic and systematic collapse. People are injured, confused, frightened and angry. What is needed from the government is a response similar to what is expected after a natural disaster. Relief must be provided, oppurtunity must be given, hope must be presented and then there has to be a clearing of the ruins. Once that is done, we must be careful not to continue living in the same houses that collpased and build different ones, stronger and more trustworthy. 

At the time of writing, the rescue people are taking a lunch break before approaching the ruins. Let’s hope someone has a plan with a different type of architecture in mind.

Related posts:

1. In the ruins
2. Two days later – our homes are at risk
3. The Non-Existent Housing Market