Iceland Reveals $1.25 Billion in Mortgage Reductions

Iceland has announced plans to write down mortgages linked to inflation by 150 billion kronur ($1.25 billion) to speed the nation’s recovery after economic collapse in 2008.

The government plans to provide homeowners with as much as 80 billion kronur in direct writedowns of home-loan debt and give 70 billion kronur of tax exemptions over three years, according to a statement handed out in Reykjavik. The deal is equivalent to 9 percent of Iceland’s $14 billion economy.

“The action requires the Treasury to serve as an intermediary in financing and implementing it,” according to the statement. “There is no need to establish a debt-relief fund, as the action will be fully financed. The net impact on the Treasury is expected to be insignificant each year during the period 2014-2017.”

Iceland’s Financial Services Association estimates the nation’s banks have forgiven about $2 billion in debt since 2008. At 14 percent of gross domestic product, that’s the highest in the world. Prime Minister Sigmundur David Gunnlaugsson won April elections on promises to provide even more relief to households.

Iceland’s government intends to finance the writedowns by raising taxes on financial institutions, a move Finance Minister Bjarni Benediktsson said today would bring 37.5 billion kronur into Treasury coffers next year. The tax will also be levied on Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf, all of which are undergoing winding-up proceedings.

‘Raise Questions’

The Organization for Economic Cooperation and Development warned the island nation on Nov. 28 that taking harsh measures against the failed banks would “raise questions” about Iceland’s economic progress.

The government’s actions are aimed at helping households that were hurt by a jump in inflation following the 2008 collapse. Icelandic home loans are traditionally linked to consumer prices, which increases the debt as the cost of living rises. Prices rose 37.3 percent between January 2008 and December 2010, according to Statistics Iceland.

Icelanders had 1.1 trillion kronur in linked mortgages at the end of June.

(Corrects amounts in second paragraph in story published Nov. 30.)
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