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Debt relief program in Iceland has been announced - 4.7% of GDP

Sigmundur David Gunnlaugsson and Bjarni Benediktsson Sigmundur David Gunnlaugsson and Bjarni Benediktsson

Yesterday the government of Iceland announced their debt relief program for Icelandic households. A total of 80 bn ISK will be used directly to write off mortgages, which is 4.7% of the 2012 GDP. The relief proposal will now go to the parliament, but it is expected that a majority of the MP's will pass the bill based on the proposals.

It is expected that a special tax will be put on financial institutions, including the banks in winding up proceedings, to finance the debt relief of 80 bn ISK (0.50 bn EUR). The amount is 4.7% of the GDP in 2012. It is expected that the program will take effect during mid year 2014 and it will have a duration of four years. The effect will be immediate, but the government plans to repay the banks during a four year period. This means that typical mortgages will be written down for around 5-6%.

There is however a legal uncertainty whether the tax on banks in winding up proceedings is legal or if it is unconstitutional. But it is likely that the tax is in fact legal and implementable. That will be explored better in coming weeks.

In addition to this, the government will allow people to use their supplementary pension to pay into the principal of their mortgages. The supplementary pension is 2-6% of salaries, and instead of paying this into the pension system people will be allowed to use this money to repay mortgages. This will be allowed for 3 years and this will be tax free. It is estimated that this method will be used for around 70 bn ISK (0.43 bn EUR), which is 4.12% of the 2012 GDP.

If the supplementary pension method is fully used by households, then the effect of these two methods might lower mortgages by around 13%, over 3-4 years.

The specialists that formed these proposals say that this will not increase inflation much, but unemployment will go down and GDP growth will increase.

The former government also did many things to help indebted households. Methods such as writing down mortgages to 110% of the market value of the house, increase interest benefits and debt adjustment helped people for a total of 83 bn ISK, over the period of few years. This number might be close to 100 bn ISK at present value. Which is 5.88% of the 2012 GDP. The former government also allowed people to withdraw large amounts of their supplementary pension, and use it for what ever people saw fit.

Many household mortgages were also ruled illegal by the supreme court, in 2010. These loans were indexed to foreign currency indexes, and that is illegal. This lead to loans being written down for around 155 bn ISK, which is 9.12% of the 2012 GDP.

So the method announced yesterday writes down mortgages for 4.7% of the 2012 GDP, the actions of the former government helped households with mortgages for around 5.88% of GDP, and the fact that indexing to foreign currency indices is illegal forced financial institutions to write down mortgages for around 9.12% of the 2012 GDP. So in total this is 19.7% of the 2012 GDP, just to give a ball park figure. This number does however not include the supplementary pension methods that both governments used (or will use).

 

Last modified on Sunday, 01 December 2013 19:07

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