You can write Iceland off

So the government that most people trusted to help the households through the storm hasn’t lived up to expectations. 

Tomorrow it will announce a new plan that is intended to help out individuals and households in trouble but it does invite the question of who will carry the burden of the economic crash. The answer is usually the same, the ordinary taxpayer. 

For most people, their home is their largest investment and in many cases their largest asset. Icelandic home loans are price indexed because no politician has managed to grow the cojones needed to place some of the responsibility of keeping inflation down on the lenders as well as borrowers.

After a couple years of rising inflation and the corresponding federal interest rates, real inflation ceased to exist and was driven by with growing interest payments being rolled onto customers, and the currency dropping because the owners of the banks were hedging huge bets against it.

Everyone loses out in an economic crisis but only some are bailed out. Savers in money-market funds were reimbursed by the government to the tune of 200 billion ISK. No one from the government or Central Bank has told the nation why. Dying companies with massive debts are being taken apart, sold to well-connected people for small change and the carcass is left in the nationalised banks. Who gets what and what is left behind is not information that is available.

Like businesses, individuals and households have been crippled with debt in the last few years. Nothing wrong with borrowing but the original deal that assumes an inflation of 2.5-3.5% goes quickly out the window with 10-20% inflation and price-indexation for a couple of years. People have been paying extraordinarily unfair amounts of money for the priviledge of being Icelanders. 

The government is crippled, and it shows best in the fact that their only solution for individuals is extending their loans for 5-20 years. It may lower the monthly payments now, but if the past is an indicator of the future, how are things really going to add up? Is everyone expected to be able to support loans that are dependent on the whirlwind that is the Icelandic Krona? It does not make sense. 

Businesses are getting write-offs and the CEO’s that bankrupted Iceland have transferred their belongings abroad or signed them off to their spouses. But there are no write-offs for the people who aren’t CEO’s and are increasingly struggling to make ends meet. The government intends to allow for write-offs where needed but who is going to be the judge of who needs what? The Progressive Party has suggested a 20% write off across the line for businesses and individuals and in the process carefully stepping on the trap of awarding more to those who have more.

What is the solution? Abandoning the price-indexation and applying for the European Union would help. If only to tell the world and the citizens of Iceland that there is a will to build a society on rules and laws that don’t only benefit a select few. Is it likely? Probably not. Nationalism will grow with worsening economic conditions, making people more untrusting, inward and short-term focused. It will take a massive battle but it needs to be done. And if the European Union will not come to us, we will come to it, become taxpayers and citizens elsewhere. 

And you can write Iceland off.


1 Response to “You can write Iceland off”

  1. 1 Vilhjalm A. March 4, 2009 at 10:40 pm

    Ireland is facing a similar foreclosure problem, on an even larger scale. Housing prices there may ultimately drop 80%. So they have been thinking about ways to keep younger, recent house-buyers in their homes.
    Here’s one suggestion:
    The writer thinks the government should modify the mortgages to present value, but take an equity share in the difference, which the government will recover if the economy ever recovers. Makes sense.
    Elsewhere I have read the the Irish are thinking of reducing home mortgages but then adding the difference to the individual’s tax bill for the next ten years – a bad idea.

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