Since October 2008, debt-related recession has popped up one country to another. In Spain, like in Iceland, the recession has hit private mortgage-holders and other small borrowers very badly. The same counts for other countries. Part of the Icelandic solution is the so-called “110% way” for individuals and debt relief in general, in addition to changes in bankruptcy laws. The other European countries in recession need to consider if they can benefit from the same.
Iceland suffered a banking collapse in October 2008. The Government at the time didn’t rescue the banks; they were too big to safe. Consequently, after the collapse the main focus wasn’t on the debt taken over by the Government because of the banks – though there was some – but on the sky-rocketing mortgages, in particular for those borrowers who had taken out forex-linked/forex mortgages. These mortgages shot up because the Icelandic krona collapsed.
The plight of home-owners became the main political issue in Iceland and a problem that had to be resolved. In addition, the loans themselves were legally challenged. It turned out that linking interest rates to a foreign currency was illegal – but lending in foreign currency was legal. The loan contracts came in various forms meaning that some forex loans were legal, others not. The latest judgment in a series of judgments related to these loans stipulated that the interest rates should be the foreign interest rates, which were very low.
This latest ruling created a huge unbalance between those who had borrowed in foreign currencies and those whose mortgages were indexed in Icelandic krona, tied to the high interest rates in Iceland. The banks have re-calculated the forex loans and are now doing it again, where appropriate, after the latest rulings.
Apart from all this uncertainty regarding the forex loans the Government, together with mortgage lenders, has eventually found a solution for those who were saddled with mortgages – no matter what type – they could no longer afford. The short version is that mortgages are brought down to 110% of the value of the property. This means that sums above the 110% are written off. This is now called the “110% way” in Icelandic. In addition, banks have been willing to negotiate write-offs for companies.
Ireland was hit by a banking crisis at the same time the Icelandic banks collapsed. Ireland, with very low public debt, took on the banking debt, didn’t properly clean up the banks until much later (and possibly still not enough) and wound up saddled with debt, which originated in a finance sector that lent too much to too few – as in Iceland – and lent too much into just one sector of the economy, construction. In Ireland, private debt migrated to the public sector. Losses that should have been born by the banking sector weren’t allowed to fall there, for fear of a financial meltdown spreading to other European countries.
Ireland is still not in a good place and might very well be forced to ask for more money from the European Union. Ireland, as Greece, has been forced to cut down on public service though the outlook in Greece is much more horrific. At least, Ireland is still attracting foreign investment, something so painfully lacking in Greece.
As in Iceland, home ownership is high in Spain. From mainly living in some sort of tenancy arrangements Spaniards took to home ownership in the latter part of last century like the Northern Europeans took to the Spanish beaches. With the housing boom and the Spanish Cajas focusing on mortgages there has been a fair bit of over-borrowing/over-lending to individuals in Spain as is clear from this insightful article in Der Spiegel, by Juan Moreno, a Spanish journalist who grew up and lives in Germany.
One of Moreno’s relatives in Spain profited from the boom, bought a truck and then several trucks. Now he is bankrupt. Bankruptcy in Spain is harsh – there is no end to it. In Iceland, bankruptcy laws have been changed and the debt period is now down to only two years. Theoretically, the debt can be kept alive longer but any creditor needs more than ordinarily good reasons for doing so. In Iceland, Moreno’s cousin Pepe would have the perspective of starting all over again after two years. And most likely, an Icelandic bank would have written most of the debt off and allowed Pepe to keep one truck, with which Pepe could make a living for himself and his family and the state would get some taxes.
At the core of Iceland’s best crisis recovery is debt relief. It certainly is true that the recession-hit euro countries need a growth plan – but they also need to look at such basic things as bankruptcy laws and writing off debt quite fiercely. Otherwise, no growth plan, however clever and well funded, will really help. If the Spaniards want a reason to go out and protest this is a good point to protest on: more write-offs on individuals and small companies and changes in the country’s bankruptcy law.
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