Tornado Alley (PROG)

[StephanieVanbryce]

Iceland to Present Bill to Wipe Out Personal Debt, Minister Jonasson Says

Oct 13, 2010 3:40 AM PT

Iceland’s government will this week present a bill allowing debtors to walk away from obligations that exceed asset values and to nullify personal bankruptcies after four years, Internal Affairs Minister Ogmundur Jonasson said.

“All Icelanders can see that our society is currently in turmoil,” Jonasson said in an interview in Reykjavik. “We’re therefore required to sit down at the table and offer solutions; I don’t anticipate that the people running financial institutions will disagree.”

Prime Minister Johanna Sigurdardottir’s coalition is holding talks with the lenders today to thrash out housing market reforms after about 8,000 protestors gathered outside parliament last week to show their anger over rising homeowner insolvencies. The International Monetary Fund, which is leading Iceland’s $4.6 billion bailout, estimates that 63 percent of the island’s loans are non-performing.

Jonasson, who spoke in an Oct. 11 interview, says he favors a proposal put forward by the Interest Group of the Homes, which represents households demanding debt relief. The lobby group wants lenders to forgive about 200 billion kronur ($1.8 billion) in mortgage debt.

The opposition, which met with the government yesterday, is likely to back the proposals.

IMF Obstacles

“The banks need to be willing to accept that the debts of households are corrected,” said Gunnar Bragi Sveinsson, a Progressive Party lawmaker, the country’s second-biggest opposition group, in an interview. “The opposition has been of the opinion that some kind of a general reduction of debt needs to take place; the form and shape of that reduction has to be calculated down to a number that society can agree on.”

Sigurdardottir has already extended by five months a moratorium on foreclosures due to expire in October, a measure that may breach the terms of her government’s agreement with the IMF. The fund won’t be “allowed” to hinder the government’s efforts to reduce household debts, she said on Oct. 8.

The country’s banks are state-controlled successors to the failed lenders that brought down the economy two years ago. The resolution committees of Kaupthing Bank hf and Glitnir Bank hf agreed on behalf of creditors to take stakes in the new lenders, Arion hf and Islandsbanki hf, to cover part of their claims. Creditors of Kaupthing, Glitnir and Landsbanki Islands hf are owed as much as $86 billion in total.

'Enormous’ Problem

A write-down of $1.8 billion is equivalent to about 8 percent of total assets at Iceland’s three biggest banks, their 2009 balance sheets show.

“The problem is enormous,” Eyglo Hardardottir, a lawmaker in the Progressive Party, told local broadcaster RUV today. “No solution is simple, but this is doable.”

Most of Iceland’s mortgage debt is based on inflation- linked bonds. The consumer price index soared 41 percent from January 2007 through September this year, according to Statistics Iceland. Real wages fell 10.1 percent from the beginning of 2007 through August this year, the last period for which data are available, according to the office. Real disposable incomes slumped 20.3 percent last year, the central bank estimates.

“Yet another matter we need to complete in the next few days is how we can rid Iceland of the inflation index, which is atrocious,” Jonasson said.

Footing the Bill

Though most of the country’s non-performing loans stem from Arion, Islandsbanki and Landsbanki successor NBI, according to the IMF, the biggest provider of inflation-linked debt is the state-backed Housing Financing Fund. The HFF accounted for 64 percent of Iceland’s 1.23 trillion kronur in outstanding mortgage debt at the end of June, according to the Financial Supervisory Authority.

HFF Director Asta H. Bragadottir said the mortgage lender isn’t able to withstand a flat reduction of all its home loans, in an interview today. If it is forced to write down the debt, the government will need to cover the loss or the country’s pension funds, which hold most of the bonds backing the debt, would need to agree to take the loss.

http://www.bloomberg.com/news/2010-10-13/iceland-to-present-bill-to-wipe-out-personal-debt-minister-jonasson-says.html