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“Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association.“
It’s Not a Theory
When it was Wrong from the Beginning:
The Highest Form of Economic Stimulus is to
Correct Debt Balances
Editor’s Comment: Iceland has taken the obvious common sense approach — fueled by an outraged population — and ended up creating the largest fiscal stimulus of any developed country without spending one cent of taxpayer money and without printing any “quantitative easing” currency debasing their currency. By the way more than 90 bankers there are headed for jail. Sounds like magic? That is what U.S. Banks would have you believe. But it is true as you can see from the Bloomberg article below.
The problem has been that the populations cannot pay the interest or the principal on debts that were so exotic in their construction that Alan Greenspan confesses he never understood them, let alone the borrowers. Borrowers were forced to rely on misrepresentations by the Banks and their agents as to the value of the loan, the value of the collateral and the viability of the transaction.
People in Iceland rioted in the streets throwing rocks at politicians and government buildings — not because they owed the money but because they knew that (a) they were victims of bank fraud and (b) the banks owed them money, not the other way around.
Under pressure from the government, the banks have decreased household debt by around 25% so far. The banks have not collapsed, financial system is in good shape and Iceland leads the developed world in economic recovery. The risk fell back on the Banks, the perpetrators of this mess.
The relief was and is being shared by two victims — the households tricked into buying these debt packages and the investors who pooled their money to fund the exotic debt structures. The claims of bank losses have been ignored as being not (and never were) economically real.
That’s what happens when the populations rises up and says “NO!” Similar programs here even on a small scale have corroborated the Iceland experience. And yet we continue to support the banks whom we believe are too big to fail. Following the Iceland example — now in its 3rd year — would provide many trillions of dollars in fiscal stimulus to our economy, launch the economy into a full recovery and clear up the budget deficits of local, state and federal government agencies.
It’s a choice. What do you choose?
Icelandic Anger Brings Debt Forgiveness in Best Recovery Story
By Omar R. Valdimarsson
Icelanders who pelted parliament with rocks in 2009 demanding their leaders and bankers answer for the country’s economic and financial collapse are reaping the benefits of their anger.
Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association.
Icelandic Anger Brings Debt Forgiveness
A cyclist passes an Icelandic national flag hanging in a popular shopping street in Reykjavik, Iceland.
A cyclist passes an Icelandic national flag hanging in a popular shopping street in Reykjavik, Iceland. Photographer: Paul Taggart/Bloomberg
“You could safely say that Iceland holds the world record in household debt relief,” said Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen. “Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”
The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates. It costs about the same to insure against an Icelandic default as it does to guard against a credit event in Belgium. Most polls now show Icelanders don’t want to join the European Union, where the debt crisis is in its third year.
The island’s households were helped by an agreement between the government and the banks, which are still partly controlled by the state, to forgive debt exceeding 110 percent of home values. On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses.
“The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, they should look at how successful the 110 percent agreement was here,” said Thorolfur Matthiasson, an economics professor at the University of Iceland in Reykjavik, in an interview. “It’s the broadest agreement that’s been undertaken.”
Without the relief, homeowners would have buckled under the weight of their loans after the ratio of debt to incomes surged to 240 percent in 2008, Matthiasson said.
Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates.
Housing, measured as a subcomponent in the consumer price index, is now only about 3 percent below values in September 2008, just before the collapse. Fitch Ratings last week raised Iceland to investment grade, with a stable outlook, and said the island’s “unorthodox crisis policy response has succeeded.”
People Vs Markets
Iceland’s approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn.
Once it became clear back in October 2008 that the island’s banks were beyond saving, the government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona and new state-controlled banks were created from the remnants of the lenders that failed.
Activists say the banks should go even further in their debt relief. Andrea J. Olafsdottir, chairman of the Icelandic Homes Coalition, said she doubts the numbers provided by the banks are reliable.
“There are indications that some of the financial institutions in question haven’t lost a penny with the measures that they’ve undertaken,” she said.
According to Kristjan Kristjansson, a spokesman for Landsbankinn hf, the amount written off by the banks is probably larger than the 196.4 billion kronur ($1.6 billion) that the Financial Services Association estimates, since that figure only includes debt relief required by the courts or the government.
“There are still a lot of people facing difficulties; at the same time there are a lot of people doing fine,” Kristjansson said. “It’s nearly impossible to say when enough is enough; alongside every measure that is taken, there are fresh demands for further action.”
As a precursor to the global Occupy Wall Street movement and austerity protests across Europe, Icelanders took to the streets after the economic collapse in 2008. Protests escalated in early 2009, forcing police to use teargas to disperse crowds throwing rocks at parliament and the offices of then Prime Minister Geir Haarde. Parliament is still deciding whether to press ahead with an indictment that was brought against him in September 2009 for his role in the crisis.
A new coalition, led by Social Democrat Prime Minister Johanna Sigurdardottir, was voted into office in early 2009. The authorities are now investigating most of the main protagonists of the banking meltdown.
Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.
Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.
That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.
The U.S. subprime crisis sent home prices plunging 33 percent from a 2006 peak. While households there don’t face the same degree of debt relief as that pushed through in Iceland, President Barack Obama this month proposed plans to expand loan modifications, including some principal reductions.
According to Christensen at Danske Bank, “the bottom line is that if households are insolvent, then the banks just have to go along with it, regardless of the interests of the banks.”
To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik email@example.com.
To contact the editor responsible for this story: Jonas Bergman at firstname.lastname@example.org
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