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.