I’m bumping up a comment from this post about the FX loans since Magnús Birgisson has a very interesting take on the FX loans and explains some of the issues better than I ever could. Also, I’m thrilled that an Icelander has taken the opportunity to enter into the discussion — I really, really wish more of my countrymen and -women would take the opportunity to enter into dialogue with IWR readers and explain some of the issues presented here from an Icelandic perspective.
Much the same misundarstanding surfaces here as in the public debate in Iceland.
Let me try and explain a few fundamentals….
Taking out a fx loan was a choice between fx or an index linked loan with higher interest rate. Historically, inflation has been higher in Iceland than krona depreciation. Therefore taking out an fx linked loan makes perfect economical sense. Those saying that taking out an fx linked loan when your wages are in kronas should remember that your wages are not index linked either…so….same difference.
It just goes to show that if you are a borrower in Iceland (or put differently…a young person starting your own family) you are fucked. Excuse the french.
Exchange rate fluctuates +/- 30% around a mean. CPI only goes higher…and higher….and higher. As long as you can absorb the fx fluctuations then you are better off with a fx linked loan rather than CPI linked one.
The krona didn’t depreciate by a 30%. It collapsed by 100%…and even more against some currencies. This was not a result of “normal” currency fluctuations but excessive bets against the krona by the icelandic banks (the lenders of the fx loans) and their biggest owners. The icelandic parliaments investigative report indicates this could in fact be investigated as a. market manipulation or b. outright fraud.
Finally….who pays the bill if the fx link on all loans are deemed illegal? The two biggest banks have already announced that the can absorb the blow. After all….they received these loans at a 50% discount (and 80% in some instances). So if my math is correct it goes something like this. The loans amounted to 100 when issued. The krona collapses by 100% so the loans go to 200. The new banks take over these loans at a 50% discount so 200 goes back to 100 or the original amount. More or less….give or take. The end result is that who pays is not the icelandic taxpayers but the lenders to the icelandic banks who already have written off the loans and in fact own the two biggest “new” banks.
The commerce ministers first impression after the high courts ruling was that this would be beneficial for the icelandic economy. I agreed with him. Obviously, someone grabbed him by the balls later and carefully explained to him what position he should take because he changed his mind.
I haven’t…
Best regard,
Magnús
Probably not everyone will agree, but I really do welcome a thoughtful, respectful and grounded discussion about all matters concerning this country. Thanks Magnús!
{ 29 comments… read them below or add one }
@Magnus
“Those saying that taking out an fx linked loan when your wages are in krona should remember that your wages are not index linked either…so….same difference.”
Don’t think so, you have two fundamentally different types of risk: inflation and fx.
In most economies income changes are far more likely to be correlated to local inflation than they are to some FX rate.
@Magnus
“As long as you can absorb the fx fluctuations then you are better off with a fx linked loan rather than CPI linked one.”
Given the correlation between income changes and local inflation, that’s wrong, or rather a misunderstanding by people who took out those loans. Strictly speaking, you are also ignoring the inflation in the foreign ccy too!
@Magnus
“This was not a result of “normal” currency fluctuations”
I think it was, the collapse in the krona was entirely normal and expected. In much the same way a volcano may not go off every day, it is normal for an active volcano to erupt.
And, the selling not carried out exclusively by Icelandic banks. I can absolutely assure you of that.
I suppose it was the dream of home ownership that lured all these people onto the rocks, I have looked at property in 101 ok so I am an Icelandic snob and it seems to be 20 million for a flat and 60 million for a house not cheap comrade citizens, especially given the wacky interest rates and inflation indexing you ran up there, no wonder people were suckered into the borrow japanese yen route. How can it be with a country with such a minute population could not have cheaper property, mind you I not being derogatory to Iceland as we have our our little property disaster unfolding down here but we managed that with 4 million people and like Iceland €20 billion given to the Anglo-Irish Bank has gone to “money heaven” ha ha as reported by their new CEO to the Dail unlikely ever to be returned to the tax payer.I think this global kreppa will run for many years nobody is going back to 2007 anytime real soon.
well, to devalue by 100% means it’s down to 0, doesn’t it? :> The IKR devalued by 50%, down by half it didn’t disappear altoghether, fortunately. To get up to the same level it would have to grow by 100% though.
Wouldn’t be sure about the rest of the post but this doesn’t really make me think Magnús understands the situation better than the rest of us…
“The krona collapses by 100% so the loans go to 200.” If the krona collapsed by 100% it would be worthless. 50% seems a more correct figure.
“The krona didn’t depreciate by a 30%. It collapsed by 100%…and even more against some currencies” The comment “the even more against *I really cannot fathom.
So I guess i don’t get the fundamentals (refering to “Let me try and explain a few fundamentals….”)
Lets say a better man than me would had let Magnus comment pass and try to understand the frustration. It comes over as nonsense at best or as overly verbose, disjointed, incoherent and maundering.
It might be an idea to let Magnus correct his comment.
For the Icelandic readers, a little perspective on the justices and injustices of how the situation is dealt with.
http://www.pressan.is/pressupennar/Lesa_Jon_Steinsson/rettlaeti-hagsaeld-og-islensk-logfraedi
According to “purchasing power parity” analysis, the krona was overvalued to begin with, increasing the risk of it going down.
Something tells me the lenders never disclosed this to the borrowers.
Well…nice of you folks to point out a more correct way of stating the same fact. If I had said that foreign currency appreciated against the Icelandic kona by 100%…would that please you more ?
Michael Lewis. Different kinds of risk….true…but that doesn’t mean that one is riskier than the other. And in fact exhange rates and inflation are also correlated. A rule of thumb in Iceland states that for a 1% currency depreciation inflation goes up by 0,4%. But this issue has been investigated time and again. Inflation in Iceland runs at a faster pace than the kronas depreciation against other currencies. Factoring in the lower interest rates on the fx linked loans it was a no brainer (at least before 2007). Accumulated cpi increase since 1972 in Iceland is 72.000% (that’s 72 thousand).
John…thanks for the literary review. We sometime say here in Iceland “it rains up his nose”. You can figure out what it means.
Two other further points.
The fact that the Icelandic supreme court recognised in their ruling is that no fx transaction took place when an icelandic individual borrowed a fx linked loan. The banks did not reach into their Euro piggy, pulled out a 1000 Euros and hand them over to the borrower to sell on the fx market. They reached into their krona piggy, handed over the 100.000 kronas to the borrower and then made out the loan agreement in a way that linked the repayments to the exchange rate. This was a perfect way to hedge their own fx exposure…without the borrower ever knowing the true risk he was undertaking.
So where did all the foreign currency that the icelandic banks borrowed actually go ? Well that is easy to explain…they went into funding the buying spree the owners of the same banks went on abroad. Hamleys, Iceland, Geest, Sampo, West Ham, Tchenguiz brothers, etc…etc. Not to mention the private jets, yachts, ski lodges, houses in Florida, New York and London.
And yes, I’m simplefying, but the fact is still the same…only a very minor proportion of the funds borrowed by Icelandic banks made their way into the Icelandic economy. The currency inflow from the Karahnjukar project alone (the biggest ever undertaken in Iceland) can explain most of the krona appreciation from 2002 until 2007.
Another thing I read here again and again is that Icelanders are somehow selling the lenders to the icelandic banks short. Well, I for one, and I’m not alone in that opinion, find the investigative report lacking in that it does not investigate the lending practices or the business practices of those foreign lending banks. I hope, for instance, when the Al Thani deal is finally brought up before the icelandic justice system, that someone actually counts how often the words “Deutsche Bank” appears in the court documents.
Because lets face it….icelandic bankers were not the brightest bunch of people you could find. I think it is highly unlikely that they could, by themselves, come up with some of the shenanigans that were going on.
Having said that…I do not look at ordinary depositors, with Icesave for instance, as lenders or investors as some do. I look at them as ordinary people who got sucked into the same Ponzi scheme as Icelanders did and I’m sorry for the money they lost. If I feel responsible is another matter but I have been made responsible wether I like it or not…
@Magnus
50% down, 100% up. That makes sense. I think you have the source of the problem, though. When Alcoa started throwing money, the economy heated up real fast, and the government had taken no steps in anticipation of it, since the Independence Party loves its Austro-Chicago Economics Kool-Aid. To head this off, the government jacked rates, which created an enormous arbitrage spread between ISK and the rest of the world, since everyone else was desperate to hold rates down. Financial players were looking for ISK paper the way a junkie looks for a fix. That’s why the loans were denominated in ISK even though they were pegged off shore: The lenders wanted the paper to play the spread, occasionally to hold but typically to flip on the secondary or derivative markets.
There were just two, teeny tiny problems with this financial nirvana. First, arbitrage spreads always close. This one slammed shut in dramatic fashion. Second, as the Supreme Court has now pointed out, the interest calculation on these loans is illegal, since ISK loans require ISK-based interest calculations. This would have defeated the lenders’ purpose, though. They didn’t want Icelandic paper; they wanted ISK paper. They knew what they wanted, they took the risk, and they wrote the loans accordingly. And they got away with it, at least for a time, as the government viewed “regulatory enforcement” as being on par with “baby rape” (and it was far from the only government to hold such an attitude). But that was then, this is now, and the piper must be paid. Those loans must be rewritten.
“According to “purchasing power parity” analysis, the krona was overvalued to begin with, increasing the risk of it going down.”
Indeed, but it’s more difficult to assess Iceland’s current purchasing power parity now that the country is no longer part of the Big Mac Index:
http://en.wikipedia.org/wiki/Big_Mac_Index
But more worrying for Icelanders is the Golden Arches Theory of Conflict Prevention:
http://en.wikipedia.org/wiki/List_of_countries_with_McDonald%27s_franchises#Golden_Arches_Theory_of_Conflict_Prevention
Magnús,
Your original blog, and applification above, is a specious argument. You seem to think that one risk is the same as another – that simply isn’t true because some risks are correlated, and more importantly in this case some risks and benefits are correlated.
In simple terms one must always match the currencies of your income and expenditure. Companies, especially those which export, spend a great deal of time and effort, ensuring that they’re NOT open to currency movements thereby ensuring a predictable flow/outflow of money in a single given operating currency.
Why so? Because currency movements occur for reasons which have nothing at all to do with your business, its products or indeed your customers. You’re open totally to variations.
The same prinicple applies to ordinary people: at all times you must, as far as possible, match the currencies of your income and outgoings. So one of the great advantages/disadvantages of inflation is that it occurs _within_ a currency zone – not across currencies. As a closed system (there is only so much of a partiular currency in the world) a general uplift in prices will be matched by a corresponding general uplift in incomes (and vice-versa). Of course individuals, as always, will win or lose by certain percentages around that mean behaviour but the general effect will be zero. (The causes of the inflation may have wider effects but I’m restricting myself to your argument.)
It is simply not admissable to make an argument on a wider point (for example an Icelander might say “My food is imported, thus I’m open to exchange rate fluctuations anyway!”) and extrapolate that into one’s own choices. There are contextual issues beyond one’s control and then there are specific circumstances that apply to you.
The risks associated with taking a loan in one currency and having an income in another are so well known and documented that it is simply astounding that anyone took out these loans. The Icelandic business schools were churning out masses of graduates – each and every one of whom would have studied this – yet not one of them apparently stated the simple and the obvious. Type in “currency mismatching” in Google and you will see literaly thousands on sites telling you not to do it, how to reduce it, or even how to avoid it.
No offence intended but I think Magnus is as cluless as the next person in the bus.
It is not that easy, in Iceland we have a desperate inbuilt assumption that there are no consequences to our actions, how can somebody spect that, “no, no problem, to the 100 you add the 100 then is 200, but the 100 was acctually 50, so the 200 are acctually 100 so the 200 are 100 and the 100 whuch were acctually 50 become 100 and the girl kissed the frog and he bacame a prince and they lived happily ever after”
@Hildigunnar mathematical genius types like you make me sick if you are so good why are you not the head of a leading Icelandic Bank for instance
@Magnus
Michael Lewis. Different kinds of risk….true…but that doesn’t mean that one is riskier than the other.
I’m afraid it does, and there lies the problem – a complete misunderstanding of the risks involved by the people taking out the loans.
How much of that is their fault and how much is due the people selling the loans? If you believe that the people selling the loans had an absolute obligation to ensure that the people had 100% full understanding – then you do open the question for who is liable.
I have not posted comments here on IWR before, altough I read it regularly. Here is a comment I recently posted on Icenews.is, that might be useful and relevant for the excellent discussion here:
———————————————————————————
There is a lot of pent-up anger going on behind this story that is probably not getting much exposure outside Iceland. Just like the “pots-and-pans” revolution, and the fight against the Icesave agreements, this is driven by ordinary people writing blogs. And, as usual the government is caught with its pants down, and doesn’t even know how to react.
First few points, that I think will explain the main issues involved:
1. At the time when these loans were issued, they were considered perfectly “normal” by most people, even though everyone with basic understanding of finance should have realized that taking consumer loans in different currency than your salary, is actually very dangerous.
2. Consumers in Iceland have over the years been offered 3 basic types of loans:
a) unindexed (at very high +20% rates)
b) ISK-indexed (typically at 5-10% over the official CPI).
c) FC-indexed (low 3-5% rates in various mix of currencies)
Its not difficult to see why many “normal” people would decide to go for option c), however stupid that may have been risk-wise.
3. The parliament in Iceland passed laws 2001/38 which removed the permission to issue FC-indexed loans, if the loan itself was paid in Icelandic kronas (FC loans were still allowed):
http://www.althingi.is/lagas/137/2001038.html
The relevant articles regarding indexing are 13. and 14. In the explanations for the bill there is the following sentence:
http://www.althingi.is/altext/126/s/0872.html
“Samkvæmt 13. gr. og 1. mgr. 14. gr. frumvarpsins verður ekki heimilt að binda skuldbindingar í íslenskum krónum við dagsgengi erlendra gjaldmiðla. Er talið rétt að taka af allan vafa þar að lútandi.”
Basically it says: “…it is not allowed anymore to index ISK loans to foreign currencies. It is correct to remove all doubt about this.”
Considering how blunt this statement is, for some reason this law was completely IGNORED by the banks and the car-finance firms, which in and by itself is amazing.
Furthermore, this new law was never enforced by the authorities or the regulators. It is interesting to note though, that the Icelandic Central Bank apparently stopped later publishing penalty rates for foreign currencies, as it “assumed” no such loans would be collected anymore.
4. About 40-50 thousand people took these FC-indexed loans, and paid a very high price when the ISK crashed in 2008. In many cases these loans have doubled, even tripled their balance, causing large number of bankruptcies and extreme hardships for many people.
5. The car-finance companies (most FC-indexed loans were for cars), have been extremely harsh in dealing with consumers that got into trouble with their payments. There have been lot of stories, about how they have repossessed the car, computed all kinds of “phony” charges to lower the recovery value of the car down to a fraction of the actual value, and are still going after the consumer for the bulk of the original loan (which is still worth 2-3 times the car). Nobody will cry over the car-finance companies going bankrupt.
6. The real trouble for the government is that the banks were also issuing large number of FC-indexed loans, and also lending money to the car finance companies. This is what they are so worried about, that it will not be only the car-finance companies that go under, but perhaps the whole banking system again. (Note that they cannot say this publicly, as in and by itself that would likely cause a crash). The potential losses for the banking system by this ruling have been estimated to be about 100B ISK (about 640M EUR).
7. The Supreme court in its judgement determined three things: a) the agreements in question were indeed loans (in order for laws 38/2001 to apply), b) the loans were issued in ISK (in some cases the loans agreements specify FC, even though the purchase, and all payments are in ISK), c) Loans based on FC-indexing are illegal according to laws 38/2001. Unlike many others involved, the courts have actually handled this reasonably well, but they of course do not have to pay for any of this.
8. The legal situation is actually pretty straightforward. The loan agreements themselves have NOT been ruled illegal, just the FC-INDEXING of those loans. The Supreme Court judgment says nothing about applying any other interest or indexing instead. It is the opinion of the people fighting against the finance companies, that no other indexing can legally be forced on these consumers, so they are required only to pay the low 3-5% interest rate (which is a gift considering the high inflation in Iceland).
9. The government, which was caught completely unprepared (unfortunately as usual), basically left it to ICB and FME to come up with a “political” solution, which are these guidelines described in the article above (everyone pay the Central Bank Rate, until things are clarified further by the courts).
10. So far the response to these guidelines has been welcomed by the finance firms, but at the same time they are vehemently opposed by the consumer advocates and the bloggers. For some examples of what they are saying, here are some of the most prolific (unfortunately all in Icelandic – please use Google translate):
http://marinogn.blog.is/blog/marinogn/
http://blog.eyjan.is/larahanna/
http://rlingr.blog.is/blog/rlingr/ (extremely detailed analysis of typically loan agreement by SP-Fjármögnun, one of the car finance companies involved)
http://www.heimilin.is/varnarthing/
http://gandri.com/
This is basically a BIG mess, with no easy solution. And the stakes are high, as bad outcome could possibly cause the banking system in Iceland to crash again. Any solution has to work BOTH legally and politically.
Legally, the issue is relatively straightforward, the loan agreements stay as they are written, just without the FC-indexing (the illegal part).
Politically the situation is more or less impossible. Either, the government let the agreements stay unchanged, with massive losses to the banks and possible crash, which would have to be covered again by the tax-payers (which are still very angry over the last crash). Or, the government can try to get a ruling from the courts or pass new laws, that somehow force the consumers to pay additional interest on top or be indexed to CPI. There is a big question however, whether such laws would actually be even legal according to the constitution and/or the EC regulations protecting consumers.
I haven’t seen people this worked up and angry in Iceland for quite a while, well at least not since the Icesave agreements. There was some news yesterday that the discussions with UK/NL were starting again, and nobody in Iceland seemed to even notice.
There’s something that’s being consistently overlooked in all these discussions, and it’s the claim made here:
“This was not a result of “normal” currency fluctuations but excessive bets against the krona by the icelandic banks (the lenders of the fx loans) and their biggest owners. ”
This isn’t true.
If you examine the money supply figures for Iceland from the Icelandic central bank at http://sedlabanki.is/?pageid=552&itemid=5a037662-26ea-477d-bda8-d71a6017cc05&nextday=23&nextmonth=7
you can see what happened by looking at the time series for the Monetary Statistics. (Third column at the bottom)
Because of the loans that the Icelandic banks were making, and in particular because of the manipulation of their equity capital holdings they massively expanded the money supply – it doubled in 2007 alone. This is why the Krona collapsed.
It wasn’t just that the loans bankrupted the people borrowing, they also bankrupted the rest of the country by massively inflating the money supply.
@Whomever Cares
Yes, swimming in international waters can wreck you really quickly. Just ask the small, US farmers who were thrown into international markets over the last 40 years by federal ag policy and then plowed under. But simply to say that the loans were extremely risky and therefore a bad idea and the borrowers shouldn’t have entered into them doesn’t fly. After all, the loans were illegal too, but no one seemed to be paying much heed to that.
The issue was, as it always is, the power to access and apply information. There is an inherent disparity in power between a commercial lender and a consumer borrower, which is why we have consumer protection laws. On one hand you have library and online articles about risk, many of which the borrower can’t understand. On the other hand you have the lender across the table, gainsaying those articles. And the lender has a legal obligation to make disclosures, but here’s USD50 against a doughnut hole that either those disclosures were not made or were buried on page 93 in 4 pt. type. Either is a violation of the law.
The lenders wrote these loans, they denominated and indexed them for their own purposes, and they knew or should have known the indexing was illegal. They put out an illegal product, and they should have to pay to remediate it, the same as an auto manufacturer who puts cars with bad brakes on the road. The alternative is to say to the lenders, “You made illegal loans and you illegally failed to make disclosures in order to close those loans, but we’re going to make the borrowers or the taxpayers cover you.” Talk about moral hazard.
James and Michael.
You make perfectly valid arguments and I’m sure they are perfectly applicable…if you live in Germany, Sweden, Belgium or any other “old” and established economies.
Alas…we are talking about Iceland here.
From december 1991 until december 2007 the cpi rose from 159.8 to 266.2. That’s an increase of 66.6% and a correspondent increase on you loans principal.
During the same period the FX index rate rose from 100 to 119.9. Thats an increase of 20%, meaning the icelandic krona fell by 20%. This is less than 1/3 the increase in the cpi. During this period the fx index rose to approx. 150 but it also fell to almost 100 again.
Furthermore, the interest rates on the fx loans were sometimes 1/3 the index rate on an icelandic loan. Interest rates in Iceland in 2009 reached 21.5%.
One measure of risk is volatility and the fx rate is more volatile than the cpi and can therefore be said to be riskier. However, fx rates have a tendency to even out over time so an fx borrower has to be able to withstand the short term volatility in order to be able to reap the benefits of long term stability.
So…in the long run…fx linked loans HAVE BEEN better than cpi linked loans….since the cpi only goes up….and up.
These are the kind of figures that borrowers in Iceland face and have to make their desicions based on.
cargocultist….the link you provided doesn’t work but from my perspective you are not invalidating my argument but rather explaining how the banks took out their bets against the krona.
By the way, the car-finance companies typically worded their agreements to be “kaupleiga” (a lease where borrower receives the ownership at the end of the lease) rather than loans. This was a clever trick, or so they apparently thought, to make sure the 2001/38 laws would not apply to them.
The Supreme Court blew this interpretation away and determined these were in fact ordinary loans, using basically the Duck-Walking argument:
“If it walks like a duck, and quacks like a duck, it must be a duck!”
“During the same period the FX index rate rose from 100 to 119.9. Thats an increase of 20%, meaning the icelandic krona fell by 20%. This is less than 1/3 the increase in the cpi.”
Yes, but local wages are far more likely to be correlated to CPI (i.e. rise with CPI) than they are to be correlated to the FX rate. Hence, you have simply two different types of risk, that you are confusing.
You wouldn’t believe the products that get sold to commercial companies to hedge out their FX risk. Now, I dont’ expect the average joe on the street to walk to an investment bank and ask for a structured FX product (take a look, these are popular: http://en.wikipedia.org/wiki/Power_reverse_dual_currency_note ) – but (at least in the UK) you can go to a retail FX brokerage and buy a string of simple forwards that lock in your FX rate for a period of time.
These are marketed to retail investors that need to minimise their FX risk (we’ve plenty of expats in London, that do have foreign currency loans for example).
That is simple hedging of risk that Icelandic borrowers were ignorant of , that costs money, now, the question is – should the lenders have insited or advised that the borrows hedge (at least a year at a time) their FX risk? Probably, but ultimately isn’t it “buyer beware”?
Magnus:
Your argument on the behaviour of inflation versus Krona depreciation is correct, it’s the reason for the Krona depreciation that i’m attempting to correct, since it’s critical to the entire problem.
When a bank makes a loan there is a potential increase in the money supply, when a loan is repaid there is a potential decrease. It is possible if you control a bank to manipulate those relationships to deliberately create money, that’s what the bankers in Iceland effectively did with their various equity capital schemes.
Over the long term money creation = inflation.
So in Iceland you have this fairly unique arrangement where loans are made, increasing the money supply, increasing inflation, and then causing the loan repayments for that loan to increase. As you say, with that kind of setup CPI can only go up, and forex loans will look good in comparison. The money supply for Iceland since the banks were deregulated went up by about 10 times.
However, if you sell loans indexed to the local CPI, in somebody else’s currency, there is no ‘benefit’ from the other side effects of inflation, increased salaries etc. as there is no local control over the supply of the foreign currency, and the foreign currency loan rapidly becomes unpayable.
“This was a clever trick, or so they apparently thought, to make sure the 2001/38 laws would not apply to them.”
In that case it looks like a political decision to bail out these borrowers – basically at the states expense. Interesting that nobody brought the issue up before; obviously it was in not in the interest of borrowers or lenders and with the knowledge that in the event of a severe crash the Icelandic state would provide the back stop. Every Icelander who took one of these loans was effectively performing their own bankers gamble with the loser being everybody else who didn’t take part.
Iceland really was a hedge fund.
@Peter – London
The Supreme Court is not here to make political decisions. They are instead supposed to interpret the laws as they are written, which is exactly what they did. It is very clear from the actions of the current government that they never expected the judgment to go this way.
If you have followed at all how this issue first surfaced and then evolved for the past year and half, I think it is safe to say, that none of the people that took those FX-indexed loans, expected anything else than these loans were perfectly legal. It was not until Marino’s blog entry in April 2009, that it became public knowledge in Iceland that the FX-indexing for these loans was in fact probably not legal.
It is correct, on the other hand, that part of the reason this issue never surfaced before, was that until 2008, everybody involved probably thought they were benefiting from these FX-indexed loans. They just didn’t know any better.
By the way, Marinó is a very determined and strong-willed person, with degree in Operations Research (OR) from Stanford University. When the banks and the finance companies decided to mistreat him regarding his own loans, they made a very big mistake, that it sure looks like they will end up paying dearly for.
I believe that the question in how far borrowers are responsible for the consequences of their choice for a loan denominated in a foreign currency can only be answered on an individual level.
Someone without any financial knowledge might easily be tempted to opt for a loan with the lowest interest rate or monthly payment, whereas someone with a university degree in finance or economics should have known better.
If a bank offers a loan in a foreign currency to someone without any financial knowledge, they should inform their client more extensively about the exchange rate risk.
I am not from Iceland, so I don’t know in how far clients where warned about the risks involved with such loans.
I think some people knowingly took a risk, others simply did not understand that they took a risk.
Things went wrong, and now everyone claims that they were innocent.
“The Supreme Court is not here to make political decisions. They are instead supposed to interpret the laws as they are written”
The decision to declare these loans was simply based on an opinion that they were loans not leases, wasn’t it? The judge could have said anything and for the last nine years this argument was accepted. Suddenly the accepted norm was dropped and argument bailing out 50 thousand Icelanders was found – in closed society like Iceland, don’t try to claim that the judiciary is independent because it isn’t.
@Beejay
I do agree with you, in general everyone should be responsible for their own choices. But in practice, it will be very difficult to say those that knew better (should have known better) they should pay, while those that are “innocent” should not pay.
The people that decided to take FC-indexed loans, took on a very unwise risk with their own livelihood. And for a while, it looked like they would pay very dearly for taking that risk, with 10s of thousands of families facing near certain bankruptcy (many are already).
But now, with this Supreme Court decision, the tables have turned, and for those that took the FC-indexed loans, it seems they will come out better and pay much less than anyone else.
The people that took ISK-indexed loans (the more careful ones), are now left behind, since ISK-indexing, according to the same laws 38/2001, is definitely still legal. And they might have to pay higher taxes in the end, to help pay for the anticipated banking losses from the FC-indexed loans.
There is nothing particularly “fair” about this decision, but it is in my view a correct interpretation of the existing laws. This is what the role of the Supreme Court is supposed to be, that is making a decision based on the current laws, as they are written.
If the all parties involved (government, banks, borrowers), could sit down together, there might be a chance for a “political” solution, that would be more fair to everyone. But somehow, based on how far downhill this has already gone, I do not think that is a very likely outcome.
You never know though, stranger things have happened. Maybe everyone finally realizes, that the courts are really not the best place to make fair decisions and find political solutions.
CORRECTION:
When I said ISK-indexed, I of course meant CPI-indexed.
@Peter – London
You are going to have to read the actual SC judgment, before you start making statements like this, that are clearly not based on facts.
For example, the borrower in case 92/2010, was “leasing” the car worth 3.6M ISK (22857 EUR), but at the end of the lease term had the option of “buying” the car for an additional 1000 ISK (6 Euros). The Supreme Court saw through this “trickery” and determined that the lease agreement was in fact a loan agreement.
Even if this kind of agreements may have been the “accepted norms” for nine years, they were still not legal. As far as I know, there has never before been a case like this brought in front of the Supreme Court, so its impossible to say it is their fault for not ruling on it earlier.
Based on your comment, who exactly was it, that decided to bail out the borrowers with FC-indexed loans through pressure on the Supreme Court? Do you have any references or evidence to back up your opinion?
The only evidence I seen so far of any pressure, is the other way around. That is, trying to undermine and reverse the Supreme Court decision. The government and the banks are in fact doing their level best to make sure this decision does not stand unchanged, since they know the cost of it is going to be enormous.
“Based on your comment, who exactly was it, that decided to bail out the borrowers with FC-indexed loans through pressure on the Supreme Court? Do you have any references or evidence to back up your opinion?”
As you put it
“The Supreme Court saw through this “trickery” and determined that the lease agreement was in fact a loan agreement.”
The judge decided that something was accepted as legal and true for nine years, was no longer. The fact that it was a lease was no longer useful. That’s simply a judgement call, an opinion and given its perfectly convenient for Icelanders now, it can be classified as a political decision.
The SC isn’t the only one that can see through “trickery”.
@Peter – London
You seem to be under the impression that there was only one judge that made this Ruling. It is actually common in Iceland when dealing with complex or important cases, to have multiple judges. In these cases there were five Supreme Court judges, that made the ruling.
It is very clear from your comments, that you have actually not read the judgments, which are very detailed (each over 8000 words) and educational. The SC judgment gives a very thorough description of all the facts of the case, and the final ruling was very much based on those facts.
If we take for example the 92/2010 case, referred to earlier, the total payments (excluding interest) was for 99.97% of the full purchase price of the car. Calling this a “lease” rather than “loan” for purchase, was obviously a circumvention by the car-leasing firms to try avoiding following the laws.
The judges also noted, that even if the agreement itself was called a “lease”, elsewhere in the agreement it referred several times to “loan”, “loan payments”, and “interest payments”, all indicative that this was in fact a loan.
Furthermore, the original agreement stated that if the customer would for some reason not be able to make some of the payments, the finance company could then cancel the agreement and immediately collect all the payments for the full term. There was no option given, for the customer to instead terminate the “lease” and just return the car.
Finally, just because something has been commonly, as you say “accepted as legal and true for nine years”, does not by itself make it legal. This is especially if laws have already been passed that specifically state this is not legal.
It was perfectly within the jurisdiction of the courts, to determine if FC-indexing was indeed lawful or not. In fact, that is their role according to the constitution. Just because the banks had disregarded the laws for nine years, and the government ignored their responsibilities to enforce those laws, is of course not enough to invalidate the laws and make FC-indexing legal. “Everybody is doing it”, is not a valid legal excuse.