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As household debt shoots through the roof, some people are going on strike

Icelandic households are in serious trouble. When the economy melted down last year, the krona plummeted and loans that people had taken in foreign currencies [they were all the rage here in 2006-2008] went through the roof. Initially the government responded by allowing people to freeze their loan payments for the time being. That freezing runs out in October, at which time households that are already heavily indebted will face an even greater burden, that in many cases will be insurmountable. Defaults have already started to increase – and starting in October they are likely to increase even more.

Predictably, the demand has been growing louder and louder for the government to do something radical to help the households. In the last few weeks and months, however – certainly during the summer – all of the government’s energy has gone into debating the Icesave agreement and the issue of the households has fallen by the wayside.

For that reason, an interest group set up last year to help households has called for a “payment strike” in October. They’re urging people to stop making loan payments, to withdraw their savings from the banks – and to use the banks as little as possible. With this they hope to draw members of the government to the negotiating table.

Fortunately [by the grace of God and all that] this does not affect EPI and I very much because we bought our property just before the boom started and the real estate bubble began. In that time, neither of us has bought a new car [we’re an absolute anomaly in Iceland], so we have no foreign currency loans – just a regular old state mortgage with relatively low interest rates. We are extremely lucky.

Others are not. As one speaker, Þorvaldur Þorvaldsson, said at the meeting:

It looks like by the end of this year nearly a third of the nation will have a negative capital position, and next year it could be close to half the nation. When half the nation is in a special measures program and is allocated ISK 70,000 [USD 565] a month to live on, how is it supposed to shoulder the Icesave debt and other government debts that just keep building up? And then how is the nation supposed to see a reason to keep on working? How are we supposed to protect the welfare system and the nation’s resources? Will they be sold at a fire sale one day, just to be able to cover the next payment or refinancing?*

A frightening notion indeed. And a bleak future vision. Ever since the collapse we’ve been waiting for the other shoe to drop – well, this might just be the time that it does. At least it is clear that the households cannot go on forever struggling to pay off ever-increasing debts … while at the same time the bank tycoons and moguls responsible for this disaster have the debts of their defunct companies written off left and right.

Such horrible injustice. And something has to be done.

THE WEATHER IS JUST THE SAME AS YESTERDAY
Blustery winds, etc. The only thing that’s changed is the sunrise/sunset times: 6.55 and 7.47, respectively. Oh, and it’s gotten colder. 8°C right now, 46F.

* Quoted from mbl.is

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  • ReallyEvilCanine September 18, 2009, 1:58 am

    Horrible injustice, indeed. And bleak. And yet perhaps (thanks to the wording of the laws passed) a way out of the mess forced upon it by another country with a score to settle that refuses to accept the fact that they utterly failed to regulate a banks operating within their jurisdiction and instead demand the uninvolved residents of the home nation of that bank’s owners shoulder the burden of their stupidity.

    You can’t help but wonder if the UK is only going after countries with smaller military forces…

  • Dave Hambidge September 18, 2009, 7:38 am

    Glad your safe but there is no way that such huge indebtedness amongst the common folk should go on; the barricades again?

  • Gary Volster September 18, 2009, 8:53 am

    There is a definitely a limit that a household can expect to pay without defaulting and it appears that this limit is on the horizon . This government had better get their head out of their ass and realize this before things really get beyond control. If the banking system goes down then it´s everyman for himself and anarchy could ensue.

  • alda September 18, 2009, 10:19 am

    REC – they argue, of course, that the bank was not theirs to regulate – it was free to operate within the EEA. There is some disagreement over this point, however.

    Dave – I think it will be the barricades again, if things keep getting worse. 🙁

    Gary – Back to the middle ages, with Icelanders slaying each other left and right. Man.

  • wally September 18, 2009, 10:28 am

    It is ironic that the Icelandic people are being expected to just cough and keep paying when the government just went to extraordinary lengths to make payment rules regarding its own ICESAVE debts.
    This stinks of double standards. I have no idea whats going to happen here but I am getting really tired of watching prices rise. One of the simple pleasures in life used to be grocery shopping, now I always come home in a bad mood. Boo!

  • kevin o'connor waterford Ireland September 18, 2009, 10:50 am

    A pretty dire situation to be left with €388 a month thats like, your on the dole but have a job, workfare I think the americans call it, just the halving of the kronas value enough to double your euro mortgage and then when you chuck in that icesave thing well its too much, if things continue to get too bad then I suppose a lot of icelanders will just chuck the keys into the bank and depart on a flight to Norway for a fresh start. As a prospective tourist though it has taken that krona collapse to make iceland affordable, rents,food etc not cheap but just similar to prices in Ireland.

  • Bromley86 September 18, 2009, 11:12 am

    The buck stops somewhere Wally.

    Time and again, I see people failing to recognise that the Icelandic government = the icelandic banks = the Icelandic people. They are all the same.

    Just look at the real situation behind all the manouevering. The banks have collapsed. Not just that, but if it was a normal bank insolvency, there would be a very low recovery rate, nothing like the 70-80% that you might normally hope for. (Remember the expected 75% Landsbanki recovery rate was after all the money was given to depositors, cutting out the bondholders)

    Ignoring foreigners, that means that every Icelandic depositor, person or company, has just had half of their wealth wiped out. To prevent that happening, the government is trying to borrow money. That will be bourne by the Icelandic people, so it’s spreading the pain out to future generations. If the Icelandic government lets off people who are in trouble, that means that the banks need more money. That means the government borrows more, which means that Icelanders owe more.

    At this level, it is not possible to write off the debt without punishing Icelanders.

    But I’m not an expert, so please feel free to correct me. I’m also not saying that there shouldn’t be some sort of debt plan.

  • Mark September 18, 2009, 11:29 am

    Something will be done, allright. Folks like yourself that did not buy the new cars are going to end up subsidizing those who did. Just wait for government bail out and the resulting higher taxes down the line.

  • Easy September 18, 2009, 12:19 pm

    One thing is clear and simple, if you can not pay fore something then you can not have it, if you can not pay for the house it is only normal that they take it away from you, and thats the best that could happen to them, then they can just go and rent a house like must people do in the rest of the world untill they are 40 or 45 and they are economicaly stable, the problem here is that people think that a 20 or 25-30 year old has to “own” a house, there are planty of houses to rent and there will be even more, anyways with inflation and devaluation they will never own those houses, and renting will be much cheeper.
    Another solution would be to do the same the goberment is doing with Icesave, get a lawyer make some sort of a contract in which you stipulate that you will pay a percent of your salary every month and if by 2024 you have not finish paying then you dont pay anymore, you start paying every moth through a lawyer and maybe it will work, yust like they expect such a contract to be accepted from the british and the dutch.
    But I still think the most reasonable thing to do is to accept that you can not pay and if you can not pay for something you shouldnt have it. if you go to a shop and the jacket you like costs more than you have in your pocket, you simply can not have that jacket, it doesnt matter if the jacket was cheeper last week and the money in your pocket was enough then, today you can not afford it. And I dont mean to be critical of people in this situation, is just that the situation is like this and I don’t see very much room for improvement and I definetily don’t see the goberment doing something about it, if they write off the debts of housholds the banks would become worthless(even more) and they would not be able to use them to pay creditors.

  • James September 18, 2009, 12:43 pm

    Assuming the banks are still nationalised, the question is whether Icelanders who aren’t heavily in debt should fund those who are. Perhaps the people themselves should decide via a national referendum.

  • James September 18, 2009, 12:54 pm

    “…with Icesave, get a lawyer make some sort of a contract in which you stipulate that you will pay a percent of your salary every month and if by 2024 you have not finish paying then you dont pay anymore”

    Um… That particular condition is not a good example as it’s likely to be the only one in the amended Icesave agreement that won’t be accepted by UK or Netherlands.

  • Andrew September 18, 2009, 12:59 pm

    If everyone in Iceland defaults on their mortgages, nothing can be done about it! If there was any attempt to evict everyone there would be a revolution!

  • Easy September 18, 2009, 1:25 pm

    My point exactly James.

  • Tom Joseph aka tj3 September 18, 2009, 2:38 pm

    In a private system when debts get too big, it is between the lender and the borrower. When these debts cannot be paid they turn into air and the borrower and the lender are the only ones to suffer.

    Now in Iceland and the USA the bad debts are now guaranteed by the government and future generations. If an Icelandic citizen had gone to Landsbanki before the trouble and said “I insist that you do not put the system at risk” they would have called the mental hospital or the police to take away the “silly person”.

    Now after the trouble the “silly person” is expected to pay up and their children and grandchildren, to pay up to cover the losses from big institutions like Landsbanki . Yet to this day no one calls the mental hospital or the police to take away the principle people who caused all this.

    People who were careful personally are being ruined by the public conditions they avoided in private life by not incurring much personal debt.

    Now “silly people” here must insist on these unnecessary public debts being turned into air, as they should have been in a real capitalist society.

    A private system of profits married to a socialism of debts is neither capitalist nor socialist but the worst of both systems.

    You can barely mind your own business under such a system and cannot tend to your own garden safely without being dragged into the mess, with your neighbors.

    In some ways now here in Florida and in Iceland we are neighbors of the Atlantic shores, in a manner unfortunate.

    We had a revolution here in the USA, a quite nice one and Iceland is a free democratic nation. Now the challenge is for the public to stop being apathetic or else.

  • Kris September 18, 2009, 4:10 pm

    Don’t pay. Squat until the police come to get you and then rent a cheap apartment. I have friends in the US doing exactly that. It takes about a year for them to do the paperwork. Then you can (at least here) ask them to show you the deed that proves they own the house and that leads to more fun.
    Another friends pays 4k a month servicing various loans and credit cards. They are about to stop paying. Having good credit is only valuable if you can use it to borrow. Who’s lending? Nobody.
    I quit paying my debits a few years ago. I got a few nasty calls, but that was about it.
    If it is going to be like this for the next 10 or 20 years, use the money you have now to get a head start on bulk foodstuffs and basic needs so you can live on less. I have a six month supply of food in my pantry. Since I live in Florida, I’ll probably get a gun too. Oh, they love to shoot each other here in the tropics!
    If Iceland is the canary, the US is the coalmine, and than may implode sooner than later. Then you’ll be able to use the Krona, Dollar, Euro, etc for wall paper!
    PS – Here is a Texas joke from JD’s dad. Why do you never ask a man if he is from Texas? Because if he isn’t, you don’t want to embarrass him.

  • Ljósmynd DE September 18, 2009, 9:06 pm

    This is certainly a delicate matter. Any household bailout has to be paid by somebody – like by those people, who acted financially more prudent, who did not buy one or more big new fancy cars and did not trade their property for a new luxury waterfront apartment at the boom time, taking out a foreign currency loan. Which shows, that a general 20% debt cut as proposed by some, would be very unfair and favour those, who took the highest risks. On the other hand – the real estate bubble is responsible for average housing becoming overpriced and thus demanding large loans. So, there has to be some graduated solution, taking into consideration the personal situation of the debtors.

  • Pool September 18, 2009, 9:18 pm

    @Easy:
    The thing is, even if you end up losing the house/apartment/what have you, you will NOT be debt free in the Icelandic system. So giving up on the apartment is not so much an option.
    Since the mortgage is tied to the CONSUMER index, as inflation goes sky rocketing, so does the loan. So even a reasonably priced home that a person could easily afford when they took the loan has seen the initial amount go up by something crazy like 40%. This is unheard of in the fairly stable economies of Europe and US/Canada (the countries we so desperately wish to be like).
    Let’s say you took an affordable loan in 2004 for 10 million ISK. Even if you have paid every single payment diligently and with interest , you owe at least 14 million ISK now.

    When asked about the indexing during the campaign, the leaders of Samfylkingin invariably argued that the “Mortgage tied to Consumer Index” wasn’t legal in the EU, sort of implying that it would go away if/when we join. I’m pretty pro EU and the current government, but come on, that is a really dumb argument, households are going to go under en masse long before we join.

  • idunn September 18, 2009, 9:45 pm

    I’d far rather be in your position than the many other individuals with unsustainable foreign debt. Unfortunately your neighbors constitute the better part of the nation, and where they go, all others, too.

    Given the unprecedented nature of this disaster, the obvious unfairness involved, it perhaps time for a different paradigm. While many individuals may deserve their fate, Iceland as a whole clearly does not. Why continue playing by rules of a game that are intrinsically stacked against you? International finance will suck your nation dry if allowed.

    In the end Iceland will receive the fate it deserves. Its citizens might collectively inform the world that they reserve the right to continue as a sovereign, intact nation. And if that involves reordering debt, individual and collective, into a sustainable form, whether the IMF or other bankers like it or not . . . then so be it.

  • Alexander E. September 18, 2009, 10:06 pm

    A private system of profits married to a socialism of debts is neither capitalist nor socialist but the worst of both systems.

    Well said, Tom Joseph aka tj3
    But people still believe in it. That’s the problem.

  • Dean September 19, 2009, 2:38 am

    During the banking crisis of last October, the Chinese blogosphere was abuzz with proposals to have a million Chinese pitching 10000 Euros each to pay off the whole foreign debt in exchange for residency rights. And perhaps an extradition treaty for bankers. It would be tuangou (group-buying) on a national scale.

    It quadruples the population (spurring consumption and the housing sector), makes IceSave go away, and provides ample amounts of foreign currency with which to start the next globe-trotting investment bank…er…forget that.

    Why not take it seriously, though? I’m sure many Icelanders will like to see Kaupthing bankers tried in one day and eating a bullet for breakfast the next day…

  • Silvia Planchett September 19, 2009, 8:31 am

    Alda, doesn’t you loan go up with inflation?

  • Silvia Planchett September 19, 2009, 8:36 am

    Should have read “your” loan vs “you” loan!

  • Joe Jarrell September 20, 2009, 10:15 pm

    In 1969 when Boeing lost the SST contract, there were billboards that read” last one out of Seattle turn off the lights”. We had massive unemployment following the contract loss. I know that Iceland is a Civilized Country, but you must have the feeling that “Public Executions of Politician”s & CEO’s” may lift the publics spirits.

  • Bob Beck September 21, 2009, 5:53 am

    I think the UK and the Dutch made their own Icesave deposit holders “whole” for their own domestic political reasons. The Dutch and UK taxpayers are out the 5 billion dollars and those taxpayers are holding the bag. Trying to extract 5 billion dollars from 300,000 thousand people really will not happen, especially if Iceland pays slowly. Is the IMF a debt collector or a lender of last resort. Can you carry an empty promise to pay someday as an asset on your balance sheet. We will see. I notice that in google earth that when the polar cap is gone Iceland will be on the direct shipping routes from Asia. Maybe Somali style piracy or tariff enforcement is the future industry. To the Longboats again!

  • cammy September 22, 2009, 11:30 am

    Blaming the UK/Holland is masking the real culprits. As someone else said, if the banks were allowed to go under and were not fully covered for deposit insurance then Icelandic savers would have been hammered too.

    The UK is not getting out of this Scot free either, savage cuts in public spending are being planned now and their currency is also weakening. The only people with their heads aqbove water in this mess are the bankers who made out like bandits for years and those who indebted themselves with piles of debt they could never hope to pay.

  • Norman Valz September 23, 2009, 2:17 pm

    I think the idea of a strike by the victims of the financial crisis is brilliant. I am surprised it hasn’s caught on more quickly. Here is a clip of someone in the U.S. who has started speaking out and has received some notoriety.
    http://www.youtube.com/watch?v=jGC1mCS4OVo

  • Healthy sceptic September 25, 2009, 9:08 pm

    As far as the politicians of Iceland are concerned, there is one really dangerous limiation – and that is the ability of the Icelandic public pay system to provide for their needs. In other words those activists in the political cadre will not make much money out of politics.

    Unless they join the EU. Where they can access the EU gravy train.

    Icelanders wake up and see what is happening. The Independence Party were a collection of self-interested, assertive schemers with a set of empty promises. And the Socialist are a collection of self-interested, assertive schemers with a different set of empty promises.

  • Pat Donnelly September 26, 2009, 5:30 am

    Hi!
    Thank you for your blog! We nearly all feel sympathy for you! Especially the Irish as we have been told that the genome project showed that you are 50% Irish and 50% Scandinavian?
    Mark is correct, you will not be as subsidized as the rest of your citizens, but then virtue will keep you warm!
    Debts are just a notion. They are intangible liabilities. Will the Iceland courts enforce foreign debts? The US courts some of them, esp in Cleveland, found that all the paper work had to be correct to foreclose.
    Who would buy in Iceland if they are to be sold? If a local boycott of property is successful as it was in Ireland after 1840 AD, then you may suffer again as your house will drop in value. So sell now and buy back later is an option for you!
    Great blog!

  • Pat Donnelly September 26, 2009, 5:36 am

    Another thing. Keep on the right side of your capitalists! They may find it necessary to return home. Tax them but do not be too harsh as their capital, that was once yours, will be essential soon. Make sure that they realize that they can return but that it may be pricey. Consider non-renewal of passports etc as this may help them to negotiate a return.

  • addddd October 1, 2009, 12:02 am

    to the barricades!
    if half the country is in debt and banks start kicking people out of their homes for non-payment, who do they think will buy these homes once they are empty?
    stay in your homes! do not pay!
    in the US a debtor’s revolt movement is slowing gaining steam, and this news from Iceland is very inspiring.
    the whole world is watching, set a precedent for a fierce resistance to the swindle we are all going through!
    solidarity from the US!

  • Neil October 3, 2009, 2:27 am

    I’m surprised that the commenters don’t have some better solutions. I think Iceland should consider signing a treaty with China or Russia allowing them to fish their waters in return for a loan. Iceland’s fisheries are quite wealthy and have an extensive area of well stocked fish to fish from. While this might be a blow to Iceland’s ego at least it would show the world you are willing to stand for at least a portion of your debts. Many Latin American countries gave up parts of their mining resources to settle thier debts and know they have stable currencies. It’s silly to simply not just pay your debts. The rest of the world could simply choose not to trade with you with little worry of any reprecussion. It seems the better way out is to at least honor the debts and make an honest effort to pay off some of them. In the past countries that were indebted like Spain had to give up their gold to pay their debts. France sold the Louisiana Purchase to the US top pay its bills and Russia had to sell Alaska to pay its debts. In the 1980s many US real estate men like Trump went bankrupt. The Japanese swept and bought many iconic buildings and properties at firesale prices. By maintaining a free market Japan agreed not to call in the US debt.
    Iceland is a fairly likable country. I think creditors would be willling to forgive a good portion of the debts if Iceland a) honored the debts and b) made some sort of concessions.

  • Norman Valz October 3, 2009, 5:59 pm

    I absolutely disagree with Neil. First off, this is not a legitimate debt which should burden the general population of Iceland (the Icesave Debt). This was the Socialization of private financier losses which have no business becoming part of the public’s debt burden in the first place.

  • Bob Beck October 3, 2009, 7:14 pm

    The debts enumerated by Neil are sovereign debts incurred by governments. They should be paid. Icesave was a private not public institution never “backed” by Iceland. Private debts are extinguished by bankruptcy not bailout. Capitalism without bankruptcy is like Hamlet without the Prince. Iceland should utterly reject Dutch and British demands. Q.E.D.