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

From Vilhjalm A. (translations mine ):

Finally the government has come out with their version the of the “skjaldborg” – the fortress around Icelandic homes.

Here’s what the government proposes to do:

- special solutions for those with low income or have suffered short term drop in wages
- solutions for people with two homes
- lower limits on penal interest rates
- on foreclosure, the market value of homes will be withdrawn from claims
- people will be able to live in their home for 12 months in spite of bankruptcy or foreclosure
- the limits on collection fees lowered
- rules on tax claims write offs reviewed
- moderate write offs tax free
- large write offs taxed
- effects of price indexation limited

The average employed working Icelander with a mortgage gets ….. just about nothing. No reduction / write-down of the mortgage principal. No way to negotiate with the banks, except by filing a lawsuit against them.
But if you own TWO homes, congratulations, you get relief – just give back one of the houses!

Oh my! This is going to be costly. How should we finance the rebuilding? - Johanna and Steingrimur at the household debt cliff drawn by Halldor Baldursson

See the critical article by Samtök lánþega blog, entitled “Ekki neitt !” (Nothing!):
http://gandri.com/?p=885

There is nothing on previously defined solutions for mortgage adjustments.

There is nothing there on actions to force financial institutions to abide by the laws.

There is nothing there about interpreting unclear contractual obligations in the favor of consumers, as is clearly stated in Icelandic law that it should.

There is nothing there about actions to stop collection methods based on contracts which have been judged illegal by Icelandic courts.

There is nothing there about speeding up those court cases awaiting a Supreme Court’s decision.

There is nothing on the ideas of individual MP’s about the so-called “key-bill”.

There is nothing there on the ideas of individual MP’s about lowering the statue of limitations on individuals from 10 years down to 4.

Vilhjalm A again:

In the meantime the banks are happily handing out huge loan write-downs to businesses and granting themselves salary bonuses.

I don’t think it’s possible any longer to pretend that the government has some secret plan or motive to help the average Icelander. And the do-nothing strategy is not the result of ineptitude, either. It’s looking more and more likely that the real intention of the government is to reduce the need for imports by depriving the average person of almost all available discretionary spending, first by increasing taxes on everything and second by making them spend almost all their money on paying off loans to the banks. You can’t spend what you don’t have.

Finally my own two cents: The way they presented these “solutions” does not bode well for the Social Democrats or the Left Greens. Sure it is a step in the right direction, but the focus is on soothing the pain for those who overextended themselves during the good times, a strange emphasis for the so-called “welfare” government. It might be possible that there has developed a siege-mentality within the government after the monumental tasks it has faced since assuming the responsibility to clean up in the economic disaster area. But by calling this a definite solution and pretending like this is going to put things to rest regarding the massive household debt Icelanders are facing because of the collapse of the krona, the government appears out of touch.

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A big relief for those who have seen their loans double, but a major folly.

Yesterday I heard a Social Democrat explain how the Independence Party majority in Reykjavik’s city council was sitting pretty having adopted a Social Democratic hue.

It is outrageous to think that the Social Democrats are turning the same trick in government and playing Independence Party ball. Instead of erecting that fortress around Icelandic households and tackling the debts which are plaguing those who were financially responsible before the crash, the government and the banks have wasted no energy in saving those who loaded themselves with debt, and took those riskier currency loans instead of loans in ISK.

So who were able to get 90-110% loans in the preceding years? Who were avidly speculating in currency loans? Could that group be mostly comprised of bankers and business owners? Those who had higher wages which now have maybe been halved or more.

Consider the cases of these fictional Icelanders:

A) Who took a 100% currency loan on a 30 million ISK home and has seen it go up to 60 million ISK. Market value today estimated at 25 million. Ends up with 27.5 million after the banks and the minister of social affairs have had their say.

B) Who saved 10 million, bought a 30 million ISK home and has seen the 20 million loan go up to 24 million. Market value today estimated at 25 million. No write offs!

Rewarding the risk takers? From which end of the spectrum is Arni Pall Arnason and the Social Democrats approaching the debt issue?

This is especially interesting following the revelations that the new banks got the loans transferred from the old banks at a 31-47% discount.

And then the Gylfi Magnusson, minister of economic affairs has said that the banks are unable to write off loans for average customers because they have to write off such huge amounts for businesses. Others say that that is not true, those were left in the old banks. Which is it? We don’t know because there is extreme breakdown of communication from the government to its people.

So the government which was going to erect a fortress appears to be building a future on building new banks on the backs of average customers and writing off loans for those who took the highest risks

This is all the more galling since there has been an array of advice from world class economists like Stiglitz, Zingales and others available to the government. But maybe the 110% folly is just preferable for some reason? Maybe Icelandic politicians have not been trained to look outside themselves and their own ranks for solutions.

Related posts:

1. A Mediocre Mind In An Extraordinary Time
2. The Currency Loans Were Legal – The Dark Side Of The Government’s Inept Solutions
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The bank’s friendly customer representative brought out a spreadsheet and started entering information about his earnings and spending.

“This is what you have to do”, she said. “You have to stop taking the kids to movies, start bring lunch to work, wear out those shoes you’ve got on and I would recommend you to get rid of the car and start walking or taking the bus.” That way she estimated that he would be in good shape in five years or so, depending on course on the economy.

His correct reply would have been, “What I need to stop doing is paying 12-25% interest on everything from my mortgage to my overdraft. The consumer price indexing of everything is costing me several times more than occasional movie trips with the kids and new shoes once in a while. It basically has meant that everything I have worked for in the last 10-15 years has only left me with more debt”.

Instead he sat silent. The customer representative continued, “Well, we’ll arrange this for you with our great selection of financial products. Tell me, isn’t it time you saw one of our insurance and pension advisors?”.

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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?

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

When they are simultaneously adamant that the state’s citizens should pay up their unfair debts fully and completely.

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If the typical Icelander owes 1 million ISK in his property and 200.000 is added to the capital because of price indexation and inflation then he will not experience it as a loss at all.

That is why people are not enraged about the price indexation still being in place.

That is why people are not in the streets protesting the protection given to savers but not debtors  in the wake of the economic crash last year.

That is why you’ll hear people say ridiculous things as “The economic crisis has not affected me so much. I am only paying 5-20.000 extra a month than I did last year.”

If people got their head around the real effects of price indexation then they’d march on Althingi and burn down the banks if the price indexation would not be removed.

Until then, the Icelandic government does nothing to dismantle this weapon of mass financial destruction.

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2. An Extreme Turn For Myself And Other Icelanders
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Vilhjalm A with an interesting comment:

At the end of the news article summarizing the details of the proposed transfer of Arion/Kaupthing, we find the following statement of Steingrimur J. Sigfusson, the Minister of Finance:

“The Government is satisfied that Kaupthing Bank’s creditors have acquired the majority of the share capital in Arion Bank, and it is important for the development of the Icelandic economy as a whole that the Government contributes less than originally estimated. The bank is fully capitalized and has solid financial foundations and is an important part of the new Icelandic economy. Arion Bank should be in a position to achieve the financial restructuring of companies and offer viable solutions to indebted individuals and Icelandic households.”

In other words – thanks for taking this smelly piece of garbage off of our hands, so that the government doesn’t have to pay for all that debt to the creditors – the money that Sigurdur Einarsson and friends stole from various foreigners. The bank is not officially insolvent. But the only way for you to get any money from your new investment is if the country doesn’t go down the toilet. Now it’s your decision whether or not to write off the debt to Icelandic businesses and to write down Icelandic mortgages.”

So here we have proof that the Icelandic government did not want to do anything to help Icelandic mortgage-holders because they are the bait – the insect at the end of the fishing line – used to lure the foreign creditors to take over the remnants of the banks.

The foreign creditors’ main purpose is to maximize revenue. So does anyone think they will willingly write-off any more than is absolutely necessary? Or course not. They will try to squeeze every last kronur from the struggling Icelandic homeowners, and the Icelandic government will do nothing to stop them.

There is some logic in the actions of the government, after all it is absolutely necessary for the government to avoid having to pay off the Kaupthing debt by giving the bank assets to the foreign creditors. But the whole process is very cynical, and made worse by the secrecy and lack of explanation for the government’s strategy. Why doesn’t the government simply say what is obvious now, “sorry homeowners, we can’t help you, you belong to the foreign creditors now”?

My few cents:

- Who are the “foreign creditors”? A detailed list please. Like a blogger said yesterday, “we who are supposed to pay everything have the right to know everything”.

- How many of the foreign creditors are “recent investors”, i.e. hedge funds or investment vehicles who have bought their share at discount in the last 11 months?

- How large were those discounts?

- How do they intend to run the bank in the future?

On the write offs issue, I was on the radio show Harmageddon on Radio X yesterday where I said I don’t really have a preference for the banks being government owned or privately owned. Ultimately the government leads the way through legislation and there is work to be done there, for example installing a separation between investment banks and retail banks and removing the price indexation.

I think this “re-privatization” of the banks proves what I have been talking about regarding the government household debt solution, that it was just done to buy some time. I sure hope the creditors aren’t building their business model on expecting everyone to pay their debts as they stand because then they’ll end up with a bunch of property on their hands and bankrupt debtors leaving the country.

I for one am not going to take kindly to a smiling bank employee telling me next year that “this is now a new and different bank”, while expecting me to continue to pay my “same old loan”. So far I have paid four million to the bank in three years onto a 16 million ISK loan. The captial has not decreased, it has increased to 19.5 million ISK. What kind of society is going to stand for that kind of unfair business?

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Well duh, spying on customers’ personal matters is commonplace and very easy? If a single girl who works at a branch at an Icelandic bank meets a handsome guy downtown during the weekend, one of her first tasks on Monday will be to check on his financial status. And discuss it with her workmates.

So beware guys and girls too, because the male employers will look up your photo in the bank’s systems to show their colleagues. So update your photo regularly and visit a photographer instead of a photo booth if you want to score with a banker. And better pray your balance is in order.

One friend called her Kaupthing branch to ask about her balance. The customer service rep asked her, “oh I see you’ve been to Shalimar(restaurant). What is it like? I’ve been wanting to check it out”. The son of a Landsbanki employee got used to his mother’s helpful advise on how he should have spent his money otherwise after a while.

Bankers who have been renting out their own homes have checked on prospective tenants. And people might check on their uncle who just got a new car. And celebrities beware, according to employees of one of Landsbankinn’s branches, David Oddson is reasonably well off. Others have been used as examples of bad credit scorers within bank meetings.

If you think this is bad, imagine how incredible it is that more information doesn’t leak into the public’s domain. There must be some trust left in Iceland.

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Iceland today is also one where Sverrir Jonsson, an ordinary Icelander receives no help from the banks at all and has been chased out of his 200 sqm home in Hafnarfjordur because the banks or government are not willing to offer any solutions. While Johannes Jonsson lives in luxury after having dumped billions onto the taxpayers, Sverrir Jonsson has been contemplating suicide as he told DV.

And the banks are now concerned about getting companies they’ve taken over back on the stock exchange. The priorities in this society are fucked up as ever.

The fortress around the homes promised by the government is a joke. Mr. Jonsson and Mr. Jonsson live in different worlds.

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