Monday, March 25, 2013

Like drowning in water that's a little less deep

From the News of Iceland
Mr. Sigmundur David Gunnlaugsson, chairman of the Progressive Party, wants to reach an agreement with the foreign creditors of the fallen banks in Iceland where they hand over part of the profit from their claims on the banks, and that money would be used to write down household mortgages.

Sigmundur says that if the creditors don't play along, the government should tax them and get the money that way...

Sounds promising. I mean, if private debt is the problem, then reducing private debt is the solution. But then I read a little more of the article:
Many mortgages in Iceland are price indexed, that is indexed to the inflation. The principal of these loans increased substantially after the financial crisis, because of the high inflation that Iceland experienced. Sigmundur David wants to correct this, and write down price indexed mortgages that were taken before the crisis by around 20%...

So it looks to me like the Sigmundur guy is trying to reduce inflated mortgage balances down to what they were before the crisis.

Before the crisis, those debts were a problem in search of a crisis. Sigmundur's solution is not enough.

Source: Trading Economics

There's a good chance the 20% writedown would not even be enough to reduce mortgage principal to pre-crisis levels.

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