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Icelandic Government Presents Debt Relief Plan

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Icelandic Government Presents Debt Relief Plan

Iceland’s Prime Minister Sigmundur Davíð Gunnlaugsson and Minister of Finance Bjarni Benediktsson presented the government’s debt relief plan at a press conference at Harpa concert and conference center in Reykjavík a short time ago.

sigmundur_and_bjarni_debt_relief_plan_announcement_psPhotos: Páll Stefánsson/Iceland Review.

The plan allows for tax relief as well as debt cancellation of up to ISK 4 million (USD 33,000, EUR 24,400) on indexed mortgages per affected household. The ISK 4 million limit does not apply to up to 90 percent of households entitled to the debt cancellation. These are homes with loans of up to ISK 30 million at the end of 2010. The plan will reportedly affect—both directly and indirectly—more than 100,000 households.

According to the plan, CPI indexed loans will be corrected for the effects of inflation in excess of 4.8 percent in the period December 2007 to August 2010. The amount corresponds to a 13 percent correction of the Consumer Price Index.

sigmundur_and_bjarni_debt_relief_plan_announcement_02_ps

The plan is set to cost ISK 150 billion and will be distributed over the next four years. Due to the time needed to recalculate the loans, the actions are expected to take place from mid-2014.

ISK 80 billion of the indexed mortgages will be written off over the course of the years 2014-2017. The ISK 80 billion will be paid through increased taxes on financial institutions and winding-up committees of the collapsed banks. ISK 70 billion will be paid through tax incentives through pension system payments.

Household debt in Iceland is currently 108 percent of GDP. The measures are expected to increase consumer consumption by 0.4 percent next year and increase GDP growth by 0.1 percent and raise purchasing power of income by 0.2 percent. As a result of the actions, inflation is estimated to rise by 0.1 percent in 2014.

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