Iceland’s Premier Accuses Central Bank Governor of ‘Politics’

Iceland’s Prime Minister Sigmundur David Gunnlaugsson said the island’s central bank Governor Mar Gudmundsson is playing “politics” after the country’s top banker expressed doubt on ideas of debt relief for homeowners.

“It looks to me as if people are winding themselves up for opposing the proposals on debt relief, regardless of what they will look like,” Gunnlaugsson said in an interview with Channel 2 television last night. “But we won’t let the central bank stop us in this.”

Gunnlaugsson’s Progressive Party won Iceland’s parliamentary elections in April after promising debt relief to homeowners. The premier has suggested that creditors of Iceland’s failed lenders, Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf finance the election pledge by writing down 461 billion kronur ($3.8 billion) in kronur-denominated claims.

To complete debt relief prior to negotiating with creditors, the government is looking into establishing a correction fund, to “speed up the execution of the correction,” Gunnlaugsson said this month.

Using the central bank’s balance sheet to finance the correction fund would be “tantamount to printing money,” Gudmundsson told a parliamentary committee. “I don’t need to spell that out for you what consequences that would have.”

A government-appointed committee is expected to deliver its results on how to cut household debt by the end of this month. The premier wants to reduce homeowners debt which was the result of a spike in inflation in 2007-2010. Most Icelandic households have their loans linked to consumer prices, which increases their debt when inflation accelerates.

From January 2007 through December 2010, prices rose 37.3 percent, according to Statistics Iceland.

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