Iceland on Plan for Debt Relief Bill This Month, Premier Says

Iceland is on schedule to release a proposal on providing debt relief to households this month, Prime Minister Sigmundur D. Gunnlaugsson said.

A government-appointed committee is working on how to implement a reduction of household debt “due to a spike in inflation in 2007-2010,” Gunnlaugsson told lawmakers in the Reykjavik-based legislature today. “The correction shall be across the board but it shall be evaluated whether a cap should be put on the amount each household can get.”

Most households have their loans linked to consumer prices, which increases their debt when inflation accelerates. From January 2007 through December 2010, prices rose by 37.3 percent, according to Statistics Iceland.

Iceland’s economy was pushed into recession when its three largest banks, Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf, defaulted on $85 billion within weeks of each other in October 2008. The meltdown forced the government to seek a bailout from the International Monetary Fund and implement capital controls, which are now blocking offshore creditors from divesting about $7.2 billion in krona-denominated assets.

Gunnlaugsson has said he wants writedowns on 461 billion kronur ($3.76 billion) in claims held by the creditors of the three banks. That would help the government ease the controls and deliver on an election promise to cut mortgage debt linked to inflation.

The group will deliver its proposals by the end of this month, said Gunnlaugsson.

Another group is looking into establishing a special “correction fund” for the project, he said. That fund will work to “speed up the execution of the correction,” he said.

Inflation cooled to 3.6 percent last month, from more than 6 percent last year. The country’s central bank sees inflation averaging at 3.9 percent this year and 3.2 percent next year.

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