Tomorrow is a big day in Icelandic politics: the long awaited debt relief measures, promised by the Progressive Party during the election campaign and then taken up in the coalition government’s manifesto are ready. The plan is the work of an expert working group set up by the prime minister, lead by Sigurður Hannesson a mathematician who now works for MP Bank. In little Iceland it is known that Hannesson is a long-time friend of the prime minister. After being discussed during a cabinet meeting this morning the plan is being presented to the coalition parties today. Tomorrow there will be a press conference to introduce the new measures, which prime minister Sigmundur Davíð Gunnlaugsson has called the most radical measures of its kind anywhere in the world.
During the election campaign Progressive’s leader and now prime minister Gunnlaugsson repeatedly said that in order to wind down the estates of Kaupthing and Glitnir there would have to be “a scope” – apparently created by ISK assets, which can’t be converted into foreign currency any time soon and would then be available to the state through some never-defined way. These funds should be used for debt relief for those who have not benefitted from earlier measures. This would be a “correcting” measure to “correct” loans that shot up because of the inflation shot up after the collapse of the banks when the króna collapsed. The most common loans in Iceland are inflation-indexed loans and currency basket loans, both of which were affected by the events of October 2008.
Ever since the coalition government, Progressives with the Independence Party, was formed in summer, it has been clear the two parties do not agree on the fundamentals of a debt relief. The conservatives lean towards using any surplus to lower the public debt and are opposed to creating more debt in order to spread out money to a certain group of people. Also because the planned debt is aimed not at those who can’t pay but those who although with high debt are able to service their debt. Earlier measures by previous government were aimed at those who could not pay off their debt. The clearest disharmony between the two parties on this issue was brought to light earlier this week when leader of young conservatives urges Independence Party parliamentarians to vote against the planned measures. (Little Iceland: in Icelandic media it is noted that the leader of the young conservatives, Magnús Júlíusson has been dating the daughter of the leader of the Independence Party, Bjarni Benediktsson, for the last three years.)
The prime minister has been notoriously vague on the planned relief but has used ever grander words to describe it. To begin with the estates were the chosen source of funds. Lately – as it became clear that these funds would not be available any time soon, if at all – he has talked about tax measures, which is more in line with ideas aired earlier by the Independence Party. The prime minister has also denied these measures will somehow be funded by the government.
This morning, in parliament one opposition MP, Guðmundur Steingrímsson leader of Bright Future asked the prime minister: “Where does the money come from?” According to Rúv (in Icelandic) the prime minister “answered that it was not possible to compare the scope that needs to be created in winding down the fallen banks and the money used in direct state expenditure. The scope was created by diminishing the amount of money in circulation so the currency control could be abolished. “And when the air is being let out of the asset bubble it is natural to let the air out of the debt bubble at the same time. This is all about taking out of circulation money for which there is no funds. Such money can’t be used to buy goods and services.” Guðmundur found the answer not worth much and said he would be lying if he said he understood this and he did not intend to lie.”
The MP is hardly the only one who will struggle to make sense of this answer but as the prime minister said, people will now only have to wait until tomorrow to know all about the planned debt relief.
The big question will be how the long-awaited plan will be funded – and how the Independence MPs will react if the plan, contrary to earlier promises, does indeed rely on state funding, guarantees or anything that in any way depend on the state. As the chief economist of the Central Bank of Iceland, Þórarinn G Pétursson, said at a hearing with a parliamentary committee recently: a debt relief plan that smacks of government funding is the surest way to a rating downgrade.
*For more background on these measures and other topics related to the Icelandic economy see here.
PS Accidentally, there has been a long silence on Icelog but I now hope to be more active again. No lack of interesting topics, that is for sure.
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