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Seething anger over the FX loans

So, the anger that has been seething since the Supreme Court ruled that foreign currency loans were illegal has reached epic proportions now that the Central Bank and FSA have issued recommendations about how the repayment of the loans should be calculated.

The ruling presented a new set of problems for financial authorities here in Iceland, most notably how the loans should be reformulated — and, most specifically, which interest rates should apply.

The original loans were taken with interest rates far, far lower than normal Icelandic interest rates — because those were the rates on those foreign currencies to which the loans were indexed. The lower rates effectively offset the risks the borrowers were taking with any exchange rate fluctuations.

Now that the loans have been declared illegal, the borrowers demand that the original interest rates hold. However, Icelandic authorities and financial institutions maintain that the banks and loans institutions would take far too great a hit in such cases, in which the government [read: taxpayers] would have to step in to provide added equity. They argue that it is unfair for those who took currency basket loans to enjoy far better loan terms than those who have regular old Icelandic loans with the higher [Icelandic] interest rates that are moreover indexed to inflation, etc.

Consequently the FSA and CB have recommended that the loans be calculated at the current prime interest rates, which are around 8 percent.

The borrowers’ associations, meanwhile, are livid, and have called this a “declaration of war”. They claim that the interest rates will actually wind up being much higher, since the loans will be calculated according to interest rates in different periods since the loan was taken. Multiple lawsuits are expected to ensue as a result.

Meanwhile, dozens of stories are now surfacing of people’s dealings with the financing companies — their anger is palpable and they are not in a forgiving mood. Halldór captures it well, as usual:

The executioner is marked with the names of the two largest car financing companies in Iceland, and the speech bubble reads: He’s here to say ‘sorry‘.

Incidentally, the Financial Times has an article about this today, which quotes YT of the “popular blog The Iceland Weather Report”. Purrrr.

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  • Michael Lewis July 2, 2010, 3:12 pm

    @Financial Times

    What looked like a smart bet before the crisis turned into a nightmare afterwards, as the króna lost a third or more of its value against major currencies. This caused a sharp increase in repayment costs, adding to the pressure on recession-hit Icelandic households.

    The court decision has transferred liability for the foreign exchange fluctuation from borrowers to lenders. “It means that thousands of people are now cut down from the noose in which they have been hanging since the economy melted down,” wrote Alda Sigmundsdottir in her popular blog, The Iceland Weather Report.
    —-

    ” transferred liability for the foreign exchange fluctuation from borrowers to lenders. ”
    Lenders just pass that onto taxpayers or customers. Whether or not your approve this cost will be bourne by people who didn’t originally stand to benefit.

    Had the Krona appreciated vastly in value, I do wonder what people with these loans would think – if the courts subsequently made these illegal and effectively cost them money.

    Some people are given enough rope to hang themselves…

  • Easy July 2, 2010, 3:55 pm

    It is completly out of any logic, that these people want to keep the low interest rate but not the forign exchange risk, woulden’t they want to get the hole loan wiped off?? If the low interest rate was there to compensate the risk of FX, now the risk is gone, why would they get a “high risk interst rate”? Forget about fairness between people that took icelandic krona loans with a much higher interest rate, that by itself is very unfair, but the worse thing is that people that DIDN’T take loans, will end up paying for that, that is really really SICK!! hope that just like this people are getting togather and organising to try to get their loans dumped on the tax payers, all tax payers join against this and complaint and organize “The NO borrowers’ associations”. I think it’s very good for them and fair that the loans in FX were declared illegal, but trying to keep the low interst rate is beeing dishonest and shameless.

  • kevin oconnor,waterford ireland July 2, 2010, 7:11 pm

    Car loans denominated in foreign currency , I dont think I have heard of any country ever doing this apart from Iceland.

  • kevin oconnor,waterford ireland July 2, 2010, 8:19 pm

    @Easy good point all people without car loans chip in for those with car loans, yet another ICESAVE thing except that this is a Icelander on Icelander as opposed to the former which is sort of Iceland versus the Brits and Dutch and of course all your Banks are government departments these days.

  • alda July 2, 2010, 8:32 pm

    Actually, Landsbanki is the only one that is still a government department. The others are owned by creditors now.

  • vikingisson July 2, 2010, 11:18 pm

    Best thing you folks can do right now is watch some football and get the whole country to wear orange. Maybe that will get some sympathy for kinship.
    Go Oranje!!!

  • Alexander E. July 2, 2010, 11:23 pm

    Well, this is correct decision and people should stop complaining.
    First of all, this is one of the things that almost any visitor notices – far too many expensive new cars. Frankly, Icelanders are not that “rich” to afford cars, SUVs etc. they are driving.
    Second, the re-calculation method is fair. I know this by myself as I was in exactly same situation. I bought the car (6 years old at the time) but rejected “excellent offer” with currency loan and took “regular” one in ISK. It was two years later when I suspected something wrong with monthly payments (it was before “big crash” but krona started to dive). So I checked the papers I was receiving from bank and noticed some references to a list of currencies (before I just paid bill almost automatically as they were within the sums calculated at the date of purchase). So I went to bank and found that some clerk entered wrong loan conditions into the system (as most of the loans were in foreign currency and there were many such cases everyday – someone just hit wrong buttons). It took the bank a couple of weeks to look into the matter (and I got many Sorry of course). And I was expecting either some BIG discount or few months without payment but…
    At the end it was calculated that I was paying less than I should for the first year and a half (as computer “thought” I had currency loan with much lower interest rate) but as it was not my mistake – no “penalties” for me. And because I was paying more than I should last half of the year this offset the “deficit”. So all in all my monthly payment were corrected to the original conditions and I even got about 20,000 less from total sum I’m supposed to pay.
    This means that those who took currency loans and were able to keep their payments might expect some reduction in total sum (and much lower monthly payments). All others must switch to cheaper and older cars 🙂

    PS. Hope my explanation makes sense in English 🙂

  • Michael Lewis July 3, 2010, 9:27 am

    I do hope all these loans were for used cars. It baffles me why any sane person would buy a brand new car anyway, it looses so much of its value the second its driven from the showroom. I’ve never bought a new car in my life, even a 2 or 3 year old – if you pick a good quality make – will save people thousands of pounds/krona/dollar etc…

  • andy July 3, 2010, 10:17 am

    Alexander – yes it makes sense. Usually one might mode the answers ie work out what the answer might be (ie in ISK / local Ice interest rates) before going off the deepened. As for trying to have the cake and eat it….well that is a generic trait Easy.

    All in all, this is like watching a slow motion traffic accident that is still going on. The internal indebtedness has not been settled, Icesave remains and the Central Bank debts are still there.

    I might be wrong, but not much in the way of open, reasoned or informed discussion on these matters, so not sure anything will change.

  • Magnús Birgisson July 3, 2010, 11:50 am

    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

  • James July 3, 2010, 12:19 pm

    This concerns a transfer of liability from Icelandic individuals to a combination of mainly foreign creditors and the Icelandic state. The net effect of the judgement is therefore a transfer of liability out of Iceland. Icelanders should thus be relieved that judgements to resolve ambiguities in their legal system continue to find in favour of their kith and kin.

  • Alexander E. July 3, 2010, 4:39 pm

    Michael Lewis July 3, 2010 at 9:27 am

    I do hope all these loans were for used cars. It baffles me why any sane person would buy a brand new car anyway,

    Michael. You would be surprised by the number of insane persons if you see how many and what cars they are driving :)))
    On the other hand – how would you get used car without someone driving it from showroom to a second-hand lot?

    I personally buying just a good car no matter of the year. Last time it was 6 years old with…. 11,000 km on it only!