I found this story on a little website called www.hangthebankers.com. Now that is a great name for a website. I’m unclear about what the Iceland government has in mind and how they plan to finance the $1.2 billion debt relief plan. How exactly are they going to force Iceland bank foreign creditors to pay for this? Why are homeowners who took out excessive levels of mortgage debt being rewarded for their profligacy, while renters get no relief? It was the Icelandic government that decided to devalue the krona in 2008. They must have known the implications. This seems to be another example of people thinking they can get something for nothing because a politician promised it to get elected. Iceland is no model for the rest of the world.
The measure was introduced by the country’s prime minister, Sigmundur David Gunnlaugsson, the leader of the Progressive Party which won the late-April elections on a promise of household debt relief.
According to the government’s website the household debt will be reduced by 13 percent on average.
Citizens of Iceland have been suffering from debt since the 2008 financial crisis, which led to high borrowing costs after the collapse of the krona against other currencies.
“Currently, household debt is equivalent to 108 percent of GDP, which is high by international comparison,” highlighted a government statement, according to AFP. “The action will boost household disposable income and encourage savings.”
The government said that the debt relief will begin by mid-2014 and according to estimates the measure is set to cost $1.2 billion in total. It will be spread out over four years.
The financing plan for the program has not yet been laid out. However, Gunnlaugsson has promised that public finances will not be put at risk. It was initially proposed that the foreign creditors of Icelandic banks would pay for the measure.
International organizations have confronted the idea with criticism. The International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) have advised against it, citing economic concerns.
Iceland has “little fiscal space for additional household debt relief” according to the IMF, while the OECD stated that Iceland should limit its mortgage relief to low-income households.
In the meantime, ratings service, Standard & Poor’s, cut back on its outlook for Iceland’s long-term credit rating to negative from stable, stating that the economic measure could affect the confidence of foreign investors if it ends up being paid for by the existing creditors of Icelandic banks.