Sigrún Davíðsdóttir's Icelog

(Yet another) forex loans earthquake in Iceland

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Yesterday, the Icelandic High Court ruled in a case related to a forex loan. The ruling stipulates that although the loan contracts have been declared void and nil and unconstitutional in an earlier ruling the foreign interest rates should still apply to these loans. If this ruling will constitue an example it means bingo and bonanza to those who took out forex loans: instead of paying Icelandic interest rates of up to 20% they only have to pay 2%-5%, depending on the currency, most commonly CHF and yen.

In a log on an earlier forex loan ruling I wrote that the interest rates were still unclear but the borrowers could hardly expect to get the windfall of paying only the foreign interest rates. I was totally wrong. This is exactly what the new ruling states. The Court – or four out of the seven judges who ruled – came to the conclusion that the loan’s interest rates should prevail. The ruling goes against common sense in the sense that no bank would have lent money on these terms but well, common sense and High Court ruling don’t alway go together.

It’s still early days, the financial institutions will be mulling over this but it’s clear that after recalculating thousands of loans – in the wake of previous rulings – the work will most likely commence yet again. This time, the ruling seems to imply a huge payout for the banks. Soothing voices in Iceland say that this will not bankrupt the banks.

While those who took out forex loans might rejoice those who took out Icelandic-only indexed loans will see themselves as losers. No doubt the banks shudder at the thought that this might create a political pressure to “correct” this difference for those with the latter loans. Such voices are already being heard.

The ruling itself gives a nourishing food for thought for the legal profession. Earlier, the High Court had ruled that the Emergeny Act from Oct. 6 2008 was legal although it’s retroactive. This time the Court rules that setting new interest rates would be retroactive and interfere with the property rights in the Constitution’s paragraph 72 – even though it has already ruled that certain types of the forex loan contracts are nil and void because they are unconstitutional. – Or, not being a laywer this is my understanding.

If this new ruling turns out to be bingo and bonanza to certain borrowers the legal profession will also get something to chew on here.

*The new ruling is here, in Icelandic.

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Written by Sigrún Davídsdóttir

February 16th, 2012 at 8:31 pm

Posted in Iceland

One Response to '(Yet another) forex loans earthquake in Iceland'

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  1. Is this not a good ruling for Iceland as a whole? Not in terms of fairness or common sense, but in terms of taking a loss that would have been borne largely by Icelanders and moved it onto institutions that have significant foreign ownership?

    Bromley86

    17 Feb 12 at 11:03 am

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