From: The Icelandic Government
To: The Borrower
Subject: You just won $11.000 !!!!

After years of debate and months of implementation, Iceland’s government has made official how much write-offs each household will get through the government’s special mortgage debt relief program. Fifty six thousand households, counting over 90 thousand individuals, will get on average almost 11 thousand dollars (ISK 1.350 thousand) write-offs on inflation index linked mortgages. The amount differs from one borrower to another, with no one getting more write-offs than ISK 4 millions ($32.000).

A massive debt forgiveness program was the single biggest promise given in the 2013 parliament elections. The Progressive Party, led by Mr. Gunnlaugsson who’s now the Prime Minister, claimed that “unexpected” and “surprising” inflation rise in 2008 and 2009, due to the economic crash, must be “corrected out of fairness”. The program is supposed to be financed with taxation on the banks who went bankrupt in 2008 and are still in winding-up proceedings. After a big election win and forming parliament majority with the Independent Party, the plan was set in motion.

Total cost for the treasury will be 100 billion ISK, equivalent to just over 800 million dollars, and will be fully paid for in 2016. The amount accounts for 17,4% of expected treasury’s tax revenue in 2014, which has been run with deficit ever since 2008 but is expected to leave a surplus this year.

Index loans linked to inflation have been the most popular mortgage form in Iceland for decades, and still are. The group of people affected with the debt relief program counts for almost 30% of Iceland’s 330 thousand population. Although inflation has historically been higher in Iceland than most other European countries, hence the index linked loans, the ruling parties of the parliament believe that the inflation over two years period following the economic crash must be corrected. Inflation during those years was 12,4% and 12% respectively.

Aid to those who do not need it

Not everyone agrees with the Prime minister on the need of giving financial aid to every index mortgage borrower. Critics point out that the program only covers one type of loans, namely index linked house mortgages, and that many of those who get write-offs do not need any kind of aid from the government. Some simply believe that tax payers money should not be distributed in this way, but rather spent on something else such as boosting the health care system or paying off government loans.

Prime minister Mr. Gunnlaugsson has in turn said that the program was built to correct the unfairness of swelling loans, regardless of individual debt or credit rating.

Unprecedented procedure

The Debt Relief Program has been called a “world record in household debt write-offs”. Whether that is true or not, a procedure of this scale has not been tested often in real-life economies. In December, when the plan was being outlined, the International Monetary Fund officially criticized the plan, saying Iceland has “little fiscal space for additional household debt relief”. Rating agencies such as Standard & Poor’s also raised concerns.

Over 90% of those who applied for write-offs have been informed of their relief package, ranging from almost nothing to ISK 4 million, depending on how much aid they’ve previously reiceived.

The program is believed to have instant impact on the economy, spurring both consumption and the housing market. How much of an impact it will have is yet to be seen.

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