Iceland’s government will water down plans to forgive overdue home loans after the country’s pension funds argued the proposals threatened to deplete the value of their mortgage assets.
After meeting “financial companies, the pension funds, the municipalities and members of the labor and employers’ unions, the Prime Minister noted there was slim support” for blanket debt relief, Finance Minister Steingrimur J. Sigfusson said in an interview. “This process will take some time.”
The compromise dilutes government pledges prompted by mass protests outside the Parliament on Oct. 4. The unrest, which attracted bigger crowds than in the weeks before former Prime Minister Geir H. Haarde was ousted last year, prompted his successor, Johanna Sigurdardottir, to indicate she may support a proposal to forgive $2 billion in mortgage debt, or 17 percent of Iceland’s 2009 gross domestic product.
That indication was a political miscalculation, according to Gunnar Helgi Kristinsson, a professor of political science at the University of Iceland.
“I can’t understand this in any way other than as a theatrical gesture,” he said. “By pretending this was actually on the table and being considered, Johanna managed to provoke opponents, such as the pension funds, which look at these matters seriously and know this idea is completely ludicrous.”
The pension funds will block any proposal that hurts their assets and forces them to reduce retirement payments, Hrafn Magnusson, the managing director of the Icelandic Pension Funds Association, said in an Oct. 14 interview.
The Interest Group of the Homes, which represents households demanding debt relief, said lenders should write off as much as 220 billion kronur ($1.95 billion) in mortgages to help the 39 percent of homeowners who are technically insolvent.
The debt reduction would wipe out the impact of consumer price increases on the inflation-linked debt, according to Fridrik O. Fridriksson, chairman of the group.
Prices soared 41 percent from January 2007 through September this year, Statistics Iceland says. Real wages fell 10.1 percent from the beginning of 2007 through August this year, the office said, citing the latest available data.
Real disposable incomes slumped 20.3 percent last year, the central bank estimates. House prices, adjusting for inflation, have slumped 34 percent in the capital Reykjavik since an October 2007 peak, the central bank said in August.
Sigurdardottir said her government hasn’t given up on broader debt relief to help struggling families.
“There are different variations of a general write-down, which are currently being looked into,” she told reporters. “Some kind of a step-by-step reduction of debts, depending on debt levels, and less when debts are lower.”
Sigurdardottir “is definitely planning on implementing measures for the group that’s facing the most financial difficulties,” Kristinsson said. “However, it’s questionable how willing she was to seriously look into the idea of a flat reduction of loans.”
The government agreed to allow home owners to walk away from their debt after two years. That proposal was presented to lawmakers and is being discussed this week, Sigurdardottir said.
The proposed bill “entails a great increase in the human rights of bankrupt individuals,” said Ogmundur Jonasson, internal affairs minister, on his website.
Mortgage-backed bond yields have risen this week. The yield on the 3.75 percent Housing Financing Fund bond due 2034 jumped 6 basis points today to 3.51 percent, after soaring 14 basis points. HFF lending accounted for 64 percent of outstanding mortgage-backed debt at the end of June, according to Iceland’s Financial Supervisory Authority.
Sigurdardottir has also promised to extend for five months a moratorium on foreclosures due to expire in October, a move that breaches part of the loan agreement with the International Monetary Fund.
The premier on Oct. 8 said her government wouldn’t “allow” the IMF, which is leading the island’s $4.6 billion loan, to block efforts to address home owner grievances.
Iceland’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 Bank 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.
A write down of about $2 billion is equivalent to about 8 percent of total assets at Iceland’s three biggest banks, their 2009 balance sheets show.
Iceland, which is already ranked “junk” at Fitch Ratings, also risks putting its credit grade under pressure if it proceeds with debt relief, according to Moody’s Investors Service.
“I think the government is very aware that its option to pick up the bill again is limited,” said Moody’s analyst Kathrin Muehlbronner, in an Oct. 14 interview. “Iceland’s current position has more downsides than upsides.”
Moody’s ranks Iceland’s foreign debt Baa3, the lowest investment grade. The rating carries a negative outlook. Standard & Poor’s also ranks the island one level above junk at BBB negative.
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