Director Gunnar Sigurðsson [Maybe I Should Have] was interviewed in Fréttablaðið this past weekend. Gunnar, as is well documented in his film, is going bankrupt, despite the fact that he has lived frugally.
I lived, and live, in a 60m2 apartment. I did buy myself a fairly good car [before the collapse] with a foreign currency loan and the payments were quite manageable when I bought it. I haven’t been spending money extravagantly. Yes, I do allow myself membership in Baðstofan at World Class because I aam comfortable there. I’ll try to keep that up, even though I’m going bankrupt.
Baðstofan is a luxury facility at the World Class fitness studio and costs about ISK 185,000 a year — as compared with ISK 65,000 for us plebs.
That’s what I call having your priorities in order.
{ 13 comments… read them below or add one }
This spa is even more expensive than the Blue Lagoon, if only by a narrow margin. I prefer by far facilities like Árbæjarlaug.
But I guess, if you want to meet “fancy” people, who might have stashed away their treasures on Tortola, Baðstofan is probably the place to be.
“with a foreign currency loan ” – no such thing, its a loan with an unhedged position in a foreign currency. i.e. a gamble that an FX rate won’t go against you. I can’t understand why someone would do that for any sort of basic loan. Borrowing in Yen, to invest in Aussie or Kiwi was a sport for Japanese house wifes , Yen – interest rates near zero, Aussie, Kiwi up at 4% or so… provided the exchange rate stays stable: you make on the difference.
But doing that for a loan rather than investment income is inviting disaster. Simply a gamble that didn’t payoff.
If he had borrowed money for a massive real estate project (or whatever), and would now be facing compulsory liquidation, that would be going bankrupt in style. To me, going bankrupt over a car loan sounds just sad.
>I can’t understand why someone would do that for any sort of basic loan.
Simple. He’s not a financial analyst, all his friends were doing it and all the local financial people that he would have had dealings with downplayed the risk.
Not that that get’s him off the hook. And ultimately the bank will pay for it’s poor business sense because they won’t recover the full value of the debt from him.
You’ll likely know the answer to this (genuine) question. What would happen in the UK if HSBC and Barclays both started pushing yen mortgages? Could/would the FSA or even the government intervene?
“What would happen in the UK if HSBC and Barclays both started pushing yen mortgages? Could/would the FSA or even the government intervene?”
Yes they could, because its basically its illegal in the UK and the US for that matter. It can be done in certain circumstances – if the loan you are borrowing is the same that you earn in or you have assets in that currency (and you earn over £200k). I.e. there is no risk . Obviously the LTV is harsh, you have to put up 35% of the deposit (this is for property, obviously you won’t get a FC loan for a CAR!!). The government in a country can tell banks exactly how to behave because they make the laws. The FSA can prosecute a company for not having the correct documentation proving their salesmen have passed the qualification to allow them to sell certain financial products, never mind the products, interest rates and terms . I think you have been listening to Icelanders claiming that the EU prevents them from stopping the banks behaviour, which is absolute bollocks.
Just because everyone in Iceland was doing it doesn’t mean that its is wasn’t incredibly stupid. Icelanders must have been aware that their currency was the smallest in the world, highly volatile and they were gambling they would increase further against the strongest currencies in the world.
A normal, naive person would be scared away from such a strange idea, it must have been a concious decision based on the belief that you knew and understood the risks and benefits. You can’t have any sympathy or pity for someone who decided to borrow money to speculate on the exchange rate, they no doubt signed a piece of paper to prove that they understood exactly what they were doing.
I learnt at the age of 5 that the excuse of ‘he told me to do it’ or ‘everybody else was doing it’ is no excuse at all. As my teacher told me; “if someone told you to jump off a cliff, would you do it?”
A couple of years ago, my husband was buying a car here in Iceland and needed a loan. The car sales man offered him a foreign currency loan. My husband objected and wanted one in Icelandic krona. The sales man said that the foreign currency loans were the only ones available.
All the car sales places in our town and the ones we went to in Rvk, were only offering foreign loans. We are both physically disabled with 2 children on the autistic spectrum. We needed a car. We had a mobility grant from the health department for disabled people and used that as part payment for the car the rest in the foreign loan. One of the terms for getting the mobility grant is that you must buy a car no older than 2 years, otherwise we would have bought a much cheaper car.
The loan was for 1.8M krona. When the kreppa started the loan went within a week to 3.2M. We had been paying the loan regularly for at least one year.
We paid it off immediately from money my dad sent over from the UK, before it reached 7M or more and we lost our house. Nobody told my husband “to do it” it was just our only option at the time. Peter in London, you seem fond of addages, so here is one for you. Before criticizing a man, walk a mile in his shoes.
In the meantime our mortgage of 16M has gone up to 22M. The house is only worth 20M. We have lost all equity in the house but at least we still have a roof over our head.
LoVe Pauline
Pauline
Isn’t it normal to go to a bank to get a loan? I see the banks do loans now in ISK for cars. How can that be possible?
If its impossible to get a loan unless its in a foreign currency, hasn’t it occurred to you that you are a living in a crazy country? I was in those shoes, I’d have left the country.
Thanks Peter. Pretty-much what I thought, although I’m surprised that it’s as stringent as it is. Still, having seen the effects of foreign currency loans to retail customers, that’s a good thing.
I haven’t bought into the “the EU made us do it” argument. I still maintain that it’s the home country’s responsibility to regulate and that they do indeed have that power – just look at the conditions that the UK FSA imposed on KSF before shutting it down.
My point is nicely made by Pauline. Even someone who didn’t want to take such a loan can be convinced to, in the right environment. And she’s an immigrant and might therefore be expected to think more clearly on the subject of exchange rates than a local.
It was never impossible to borrow in ISK, in fact the proportion of loans in foreign currency is a small one, especially in the case of housing loans.
The cars are a different matter, the loans are for a much shorter period and it was possible to foresee some drop in the value of the currency but the fall turned out to be much greater than anyone could have imagined.
I remember when we were helping our son to buy a car. He found one for 1.6M ISK and paid 400 000 and borrowed the rest in foreign currency. We calculated an ISK drop of 40% and it would still be cheaper than borrowing in ISK.
(The loan is now at almost 2M ISK but as the car is worth more we are not complaining)
“We calculated an ISK drop of 40% and it would still be cheaper than borrowing in ISK.”
So there was a very strong incentive to take the gamble. You lost and take it as part of the game, which is the point of gambling; win some, lose some.
The figures AFAIR are in the region of 90% of car loans in foreign currency and 10% of house loans.
It is difficult not to borrow in some circumstance. The UK housing market is a prime example: personally I’d never borrow to buy into it at present. The market is rigged to the tune of 300 billion via a couple of schemes, one of which ‘Credit Guarantee Scheme’. It is of course inviting disaster. The UK govt. is trying to put off the problems and buy votes ahead of an election.
Not sure if the Icelandic government went as far as encouraging foreign currency loans (and in similar fashion rigging the market to the UK as above), but for most ordinary borrowers it is inviting disaster on a similar scale. I’d be a bit suprised that lenders were not forced to explain the foreign exchange risks to borrowers. Even more suprised that local currency loans were not available.
I suspect that very few people invest their savings in foreign currency speculation. And even fewer are so confident of their foreign currency expertise that they gear up by borrowing money to invest in their speculations. Surely no individuals would do that, only currency traders at investment banks – who are playing with other peoples’ money…
James – it was common practice for Japanese housewives to do this ‘carry trade’ on the Yen. Borrow money in Yen (which has for the last couple of decades had near zero interest rate) and convert this borrowed money (or more likely salary savings) and invest it in higher yielding assets. Such as the Aussie or Kiwi dollar. Both countries have stable banking systems – so the money could simply be deposited in a foreign bank, and 4, 5, or 6% earnt with little risk (less risk on the deposit than say buying shares or commodities) – apart from the FX rate. Now, if the Yen Aussie or Yen Kiwi rate stays stable, this was an easy way to earn 5% – when local Yen investments were giving them nearer 1%.
Much simpler to borrow in local currency if that’s what you earn. Even if the rate is a few percent higher than alternate currencies.
Fine to do that on income you haven’t borrowed (I do it), but on borrowings it is very dangerous of course.
Now, what the Icelandic banks should have sold is downside protection – namely ‘puts’ on the Icelandic Krona – they would have been cheap – and people would have insured themselves ….. alas only if the counterparty doesn’t go bust, and expecting a car loan to be a loan, fx put and a cds swap in case of default by the counterparty would be pushing the boundaries