Iceland has announced plans to write down mortgages linked to inflation by 150 billion kronor (US$1.25 billion) to speed the nation’s recovery after the economic collapse in 2008.
The government plans to provide homeowners with as much as 70 billion kronor in direct writedowns of home-loan debt and give 80 billion kronor of tax exemptions over three years, according to a statement handed out in Reykjavik on Saturday. The deal is equivalent to 9 percent of Iceland’s US$14 billion economy.
“The action requires the Treasury to serve as an intermediary in financing and implementing it,” the statement said. “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 to 2017.”
Iceland’s Financial Services Association estimates the nation’s banks have forgiven about US$2 billion in debt since 2008. At 14 percent of GDP, that is the highest in the world.
Icelandic Prime Minister Sigmundur David Gunnlaugsson won April elections on the back of promises to provide even more relief to households.
Iceland’s government intends to finance the writedowns by raising taxes on financial institutions, a move Icelandic Finance Minister Bjarni Benediktsson said on Saturday would bring 37.5 billion kronor 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.
The Organisation for Economic Co-operation and Development (OECD) warned the nation on Thursday that implementing harsh measures against the failed banks would be likely to “raise questions” about Iceland’s economic progress.
The debt relief promise has been met with skepticism elsewhere, with both the IMF and the OECD warning against it.
The IMF had said that Iceland has “little fiscal space for additional household debt relief,” while the OECD had called for the mortgage relief efforts to target only low-income households.
Standard & Poor’s had also slashed the outlook for Iceland’s long-term credit rating to negative from stable. It said that the plan could be detrimental to foreign investors’ confidence if it is to be funded by the existing creditors of Iceland’s banks.
The agency further warned that it could still lower Iceland’s ratings over the plan.
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 kronor in linked mortgages at the end of June.