Iceland Government presents debt relief plan - citizens first before banksters , what a novel idea ?

Iceland thumbs nose at international opposition to advance $1.2 billion debt relief plan

Published time: December 01, 2013 03:14
Edited time: December 01, 2013 04:02

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A general view of houses in the town of Vik in southern Iceland.(Reuters/ Ingolfur Juliusson)

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Economy, Government Spending, Real Estate

Iceland’s government has announced that it will be writing off up to 24,000 euros ($32,600) of every household’s mortgage, fulfilling its election promise, despite overwhelming criticism from international financial institutions.

The measure was introduced by the country’s prime minister, Sigmundur David Gunnlaugsson, the leader of the Progressive Party which won the late-April elections on a promise of household debt relief.

According to the government’s website the household debt will be reduced by 13 percent on average. 

Citizens of Iceland have been suffering from debt since the 2008 financial crisis, which led to high borrowing costs after the collapse of the krona against other currencies.  

“Currently, household debt is equivalent to 108 percent of GDP, which is high by international comparison,” highlighted a government statement, according to AFP. "The action will boost household disposable income and encourage savings.”

The government said that the debt relief will begin by mid-2014 and according to estimates the measure is set to cost $1.2 billion in total. It will be spread out over four years. 

The financing plan for the program has not yet been laid out. However, Gunnlaugsson has promised that public finances will not be put at risk. It was initially proposed that the foreign creditors of Icelandic banks would pay for the measure.

International organizations have confronted the idea with criticism. The International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) have advised against it, citing economic concerns.

Iceland has “little fiscal space for additional household debt relief” according to the IMF, while the OECD stated that Iceland should limit its mortgage relief to low-income households.

In the meantime, ratings service, Standard & Poor's, cut back on its outlook for Iceland's long-term credit rating to negative from stable, stating that the economic measure could affect the confidence of foreign investors if it ends up being paid for by the existing creditors of Icelandic banks.

http://www.icelandreview.com/icelandreview/daily_news/Icelandic_Government_Presents_Debt_Relief_Plan_0_404462.news.aspx

30.11.2013 | 17:10

Icelandic Government Presents Debt Relief Plan

Iceland’s Prime Minister Sigmundur Davíð Gunnlaugsson and Minister of Finance Bjarni Benediktsson presented the government’s debt relief plan at a press conference at Harpa concert and conference center in Reykjavík a short time ago.

Photos: Páll Stefánsson/Iceland Review.

The plan allows for tax relief as well as debt cancellation of up to ISK 4 million (USD 33,000, EUR 24,400) on indexed mortgages per affected household. The ISK 4 million limit does not apply to up to 90 percent of households entitled to the debt cancellation. These are homes with loans of up to ISK 30 million at the end of 2010. The plan will reportedly affect—both directly and indirectly—more than 100,000 households.

According to the plan, CPI indexed loans will be corrected for the effects of inflation in excess of 4.8 percent in the period December 2007 to August 2010. The amount corresponds to a 13 percent correction of the Consumer Price Index.

The plan is set to cost ISK 150 billion and will be distributed over the next four years. Due to the time needed to recalculate the loans, the actions are expected to take place from mid-2014. 

ISK 80 billion of the indexed mortgages will be written off over the course of the years 2014-2017. The ISK 80 billion will be paid through increased taxes on financial institutions and winding-up committees of the collapsed banks. ISK 70 billion will be paid through tax incentives through pension system payments.

Household debt in Iceland is currently 108 percent of GDP. The measures are expected to increase consumer consumption by 0.4 percent next year and increase GDP growth by 0.1 percent and raise purchasing power of income by 0.2 percent. As a result of the actions, inflation is estimated to rise by 0.1 percent in 2014.