Will there be a fair solution?

Morgunbladid reports that the Ministry of Social Affairs is preparing to move all foreign currency home-loans into the Icelandic Housing Fund where they will be changed into price-indexed loans in Icelandic Kronas.

Astonishingly the paper reports that the loans will be recalculated at an exchange rate similar to what it was when the loans were taken, in effect slashing the rise that came with the krona dropping 80% in the last quarter of 2008.

Those with price-indexed loans in ISK like myself are looking forward to this because this means that the government has to be willing to recalculate those loans as well, to the point where they were a year ago.

The reason so many Icelanders took home loans in foreign currency was that the Icelandic krona has been out of control since it was floated in 2001, with inflation pushing interest rates above 20% last year. With significantly lower interest rates in foreign currencies such as the yen, the Swiss frank, Euros and British pounds, it was enticing to borrow on those rates and hope for a stronger ISK which would devour the loans.

People were told that they should borrow in foreign currencies if they could handle fluctuations of 15-20% on monthly payments. Then the krona dropped 80% and a currency loan worth 30 million ISK became 54 million ISK overnight.

I spoke to a bank-employee last week who told me that his boss had called him into a meeting and told him early last year that now was the time to turn his ISK loan into a foreign one. He is obviously suffering the consequences.

But what about those who played it safe and borrowed in the currency in which they were earning becuase they did not want to play Russian roulette with their homes? Any cuts in loans to the other group is basically being dumped on the system as a whole. Is that fair?

If both groups will not be assisted then the state will be facing an avalanche of court cases based on principles of equality.

If nothing is done, then this will be the scenario. Ordinary citizens will lose their homes to the banks or the Home Loan Fund, in effect the Icelandic State. The state will sell those homes in auction. The buyers will be either people on the inside of the system who can wrangle favors or loans, or they will be owners of capital, basically those who have money left over from the good times, like Bjarni Armannsson former Glitnir CEO who escaped with billions to Norway.

The transfer of wealth will be astounding. Because the market has dropped severely, those homes will sell for less than market value and in many cases almost be gifted to those who are lucky enough to have a little cash available. The former owners will still have to pay the difference to the lender while having to rent from the new owners.

Remember that many people will have not lost their possessions because they were not careful but because the owners of the businesses they worked for and their government weren’t.

And the question everyone must be asking themselves is simple. Is this the society we want?

The bank employee knows the answer to that. He will move to Norway and never come back.


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