Heartbreaking

 

I have repeatedly brought up the madness associated with price-indexed home loans. Today, Silfur Egils published a heartbreaking letter that describes the situation that is facing the majority of Icelanders. Keep in mind while reading this letter that Geir Haarde owns his home outright, that Bjarni Armannsson, the head of Glitnir is sitting pretty in Norway with the billions that he got out of the bank and that David Oddson is still the Central Bank governor. Geir and David privatized the banks and failed to regulate them, bank-managers like Bjarni played the market with criminal behaviour like the one surrounding Stim and people like the one who is writing this letter have tried to save and buy sensibly during the same period. 

I hope it is OK that I have extracted samples from the letter and translated in English. I think it describes the situation in a way Geir Haarde and Ingibjorg Solrun Gisladottir could never explain to foreign journalists. 

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In 2005 I bougth an apartment for 22 million ISK. I had saved up 10 million ISK after 30 hardworking years. I borrowed 12 million from SPRON on 4.15% interest, price indexed. The price of the apartment rose to 25 million ISK, but I intended to stay here until my kids had left home in the next 5-7 years, then get a smaller apartment and for the first time in my life have something left over on my wages, but I am 55 years old right now. 

The monthly payments were 51 thousand ISK in the begining and everything seemed alright even though the Central Bank’s inflation-expectations of 2-4% never came close. 

Three and a half years later, my situation is this: 

The loan has risen to 15,2 million ISK and the price of the apartment is 18-19 million. I am trying to sell the place to no avail, because nothing is selling anyways. I have been laid off at the bank where I work and I will be on unemployment benefits in two month’s time. 

I am told that in the NEXT 12 months or so, my loan will rise to at least 18 million, even higher and the price of the apartment will plummet to 16-17. My equity, 10 million ISK, no small pennies for a woman who has worked all day all her life and gotten three kids through college, is gone, just gone and no one seems to think this is a big deal. 

I am told I can just stay in the apartment, keep paying high monthly payments that I need two jobs to support, if I am lucky enough to find one job, let alone two. Even if I slave through those jobs until I die, I will never do anything but just get by and the loan will keep on rising. 

The property will slowly rise in price again, I am told but oh no, then inflation will also rise and the loan alongside it. 

So, in one year I will have no equity left and will be considered lucky if I can keep up with the monthly payments. If the bank takes the apartment, then God only knows if I will get out of it still owing money or just even. If it is the former then I’ll have to declare myself bankrupt.  And that is me, the one who saved, bought sensibly, robbed of my life’s savings and posessions. And everyone is talking about the great solution of extending their loans!

Nota bene, if I extend my loan to 70 years, then I will have paid 1.354.824.000 ISK for the 12.000.000 that I borrowed in the spring of 2005. Yes, mark my words, one billion, threehundred fiftyfour million, eighthundred twenty four thousand, on 4.15% interest + the same inflation as in the last 40 months, 26%. And I haven’t even included the rise in inflation that is expected in the next 12 months. 

Those of us in that situation will probably just leave our apartments, like they do in the US. When the largest chunks of our pay disappears into the loans or the rent as they will call it then, then we will just walk out, stop paying. Then, when everyone stops paying, the economy will finally capsize according to economists.

This might happen late next year or early 2010 according to forecasts. What will happen then? I am not going to live through that I tell you. The nature of Iceland will still belong to me, no matter what bank goes bankrupt and I will lie down in her on a cold enough night, “thank” everyone for the pleasure and wish the rest of you all my blessings.

Financial sorcery

We’ve talked about the mysterious company Stim ltd. previously. Now the man behind the company, Jakob Valgeir Flosason has revealed the dark materials of the business of Stim. 

Glitnir bank itself was the largest shareholder in Stim, so the whole thing was set up to fool the market. The Stock Exchange never received any notifications of that fact and therefore the whole thing was completely illegal. Jakob himself and other shareholders in Stim were offered “a chance” to participate in the black magic by the bank.  

So what else is waiting to see the light of day?

Sour Apples

This April the MacBook Air arrived in Iceland and retailed from 189.990 ISK. The krona dropped the next week and a couple of weeks later you were paying 219.990 ISK for the same computer. Today, it will set you back 269.990 ISK.

And that is the beauty of the ISK for the Icelandic economy, you never know what you are going to get.

Apple is sold through an Independent Marketing Company, basically a reseller with extra benefits in Iceland. It is a format rarely used by the computer giant but has its benefits, such as not having to serve such a small market and taking the focus off larger markets. The IMC has been accused of extreme over-pricing because of its exclusive rights to the Icelandic keyboard. Without disclosing sensitive information, I can confirm that the profit margin is quite low, plain to see for anyone in failed attempts of large companies in importing Apple’s through their own reseller channels from abroad.

No the problem is a familiar one to those who have worked in retail in Iceland. Firstly the currency, secondly trade-barriers.

The ISK’s rollercoaster ride means that companies such as Apple IMC in Iceland never know what the price of their products are going to be next month. Every purchase and every budget is made in total uncertainty. Shoot to low and you don’t have enough products, aim too high and you have boxes of stuff sitting in your warehouse sucking your cash-flow dry. And these scenarios can happen very close to each other because the fluctuations are so wild. The losers are the company itself and the customers.

In Iceland, iPods are insanely expensive. The new 16GB Nano retails for 52.990 ISK which is over 440 USD. In the US it costs $199. It is not explained only in the weak currency though. For some peculiar reason, iPods are classified as recording-devices (like dictaphones) at the customs. So with VAT, customs and a special products tax the government ends up taking 57% of the retail price of an iPod in Iceland.

The result is that somewhere between 60-75% of iPods in Iceland have been purchased abroad, ploughing money from the shareholders of Apple IMC and out of the economy.

It means higher prices for those who cannot travel and money exiting the economy that could be put to work within it. Why should businesses want to work in this environment?

Why would customers want to live in this kind of environment?

The start of polarizing

Tomorrow should be exciting. How many will turn up at the downtown demonstration?

The last couple of months have been about shock. People have been stunned and are trying to asess the situation. Now we are beginning to see the start of polarizing. In media, blogs and on the street, people are getting fired up against each other.  

From now on, everyone will be assigned a side. You will be judged on whether you are critical of the government or not. Whether you are related to this businessman or that politician or not. We will see a lot of blame being thrown about and a lot of mud slinged in all directions.

I have never taken sides. I have never been blindsided by political parties, nor do I have any rich uncles. I used to work for the man, two of the three former poles of power. Everything I say will be countered with references to my old workplaces and whatever I was supposed to have done there, true or not.

Expect this if you are in Iceland, and especially if you are a native. We are entering an ugly period in our democracy. And the country will be worse for it.

What could lead us from this doomed path would be the following:

- All politicians could take responsibility in the form of all heads of parties in parliament resigning. This would give us the country a bipartisan ground to start on. They were all in power while disaster struck and they all have to show us some remorse.

- The ministers of finance and business could resign as well. They have to show us that they accept their role as the men in charge of the economy while it crumbled.

- The head of the Financial Regulation Authority should resign. So too, the Central Bank governors and its board. If David Oddson could retire and start writing his memoirs then that would be nice. His presence is clouding everything else and poisoning the necessary processes we need to go through. Fortunately he did not attend the open meeting last Monday or all important matters discussed in the meeting would have ended up being about his persona. We don’t need that anymore.

- The rest of the Parliament could agree on a temporary government with reps from all parties that calls for an election in May. They should appoint a new Central Bank governor for a four year period, preferrably someone with vast economic experience. They should also dismiss the regulation that allows sitting parties a generous donation from the federal budget for the votes received in the last election. It is not democratic, probably against the constitution and all common decency. They should also announce talks with the EU. 

The situation is so bad that we cannot allow ourselves an ideological civil war, where progress and justice are cast as equal opposites against status quo and greed. Look what it has done to the US. I would dare anyone to maintain that the US today is a better place than ten years ago.

Now it is a big question whether we can deliver a better Iceland to ourselves ten years from now.

This is what Friedman and Hannes Holmsteinn got us…

After 17 years of David Oddson’s Independent Party, governed by the ideology of Milton Friedman in the worshipping version of local political pet Hannes Holmsteinn Gissurarson, we now have this:

Parliament last night agreed without opposition to place strict restrictions on trade in currency. Icelanders will have a harder time purchasing foreign currencies and Icelandic businesses that make money abroad in foreign currencies are obligated to bring that money home.

So how many businesses can we expect to see moving their head-offices or opening up subsidiaries abroad to get around this? And who will suffer the most because of this law which is effective for two years?

Individuals of course.

So we are proven yet again that the economics of Reagan, Thatcher, Friedman and Hannes Holmsteinn are really about. Not about the individual but all about businesses and preferrably big businesses.

Quelle surprise.

More cuts…sorry adjustments

The state broadcasting company is slashing its budget and cutting out 20-30 of its employees.

In downturns, economists often talk about “assimilation”, “adjustments”. So we will see how many people will be adjusted out of their jobs around this weekend.

Hell or high water

I just flew Icelandair, where there was a solo passenger in the business class section, the rest half full. He was probably a government official or a foreigner. I purchased GBP for 214 ISK per pound. I think it might be a good deal, considering that the IMF loan is supposed to arrive soon and supposedly the ISK will be cast afloat. Two guys behind me were adamant that the ISK was already floating, we just hadn’t been told. Therefore purchase of foreign currency would be mad.

We will see. It’s not more or less of a gamble than what Icelanders are normally forced to take in their everyday business.

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Eimskip, Iceland’s oldest and leading shipping company has laid off 70 people and will cut down on routes. Everyone making 300.000 ISK and over per month will face a 10% cut in pay.

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Husasmidjan, a Home Depot of sorts, one of the two biggest in the country laid off around 100 of its staff and is closing down 2 stores in the Reykjavik area.

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Unemployment doubled between months and has gone from as close to a zero as you will ever get a year or so ago up to 4%. It is expected to rise further. Expect a bloody turn of the month.

I have heard of some of the tactics being used in lay-offs and am collecting those stories. The picture ain’t pretty.

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Meanwhile another person has come out to point the finger of blame. Geir Haarde’s daugther who in a column in the webzine deiglan.com, the breeding station for the Independent Party’s footsoldiers and Landsbankinn’s employees, has discovered who is to blame for the flammable situation. Of course the media. Apparantly it was the media that gave its blessings to the mob that crashed the police station last weekend and got mazed. And the media is to blame for negative reporting of the crash, trying to get answers from politicians, instead of leaving them in peace to do their work.

Her column, in Icelandic is an absolute treat and sits nicely with the other columnists at Deiglan.com who have been blaming the media, the business-men who aren’t favorable to the party and urging people to calm down and not look for people to blame.

The future is bleak if these people will inherit the earth. That’s the reason why one of my friends who has enjoyed a successful career with blue-chip companies in Iceland has given up and is in the process of moving abroad at the age of 34. Her reasoning is that Iceland is so small, so inter-connected that the politicians currently in power and their kin will never let anything be investigated and they will never let go of the powers they have, come hell or high water.

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Talk about hell or high water, wait until Icelander’s will have to celebrate Christmas without jobs, with inflation rising, home-loans spiralling and the ISK in free-fall.

The sinking island

Inflation…

…is seventeen percent.

That would mean that if you have a price-indexed home loan at 20 million ISK last year, then it would now be 23.4 million ISK.

So remind us again why haven’t other countries seen the beauty of the price-indexed loans?

It was revealed the other day that Geir Haarde is one of few members of parliament who own their house outright. So he doesn’t have to worry. Which is good for him.

Geir Haarde’s and Ingibjorg Solrun’s biggest achievement

You cannot help but agree with Orn Smari, a blogger at Eyjan.is who said their biggest feat yet was to get Icelanders out of their chairs to go demonstrate.