Iceland’s new banking disaster?
Today, from Greece to Iceland, governments are acting as enforcers or even as collection agents on behalf of the financial sector — and Iceland stands as a dress rehearsal for this power grab.
The problem of bank loans gone bad has thrown into question just what should be a “fair value” for these debt obligations. The answer will depend largely on the degree to which governments back the claims of creditors. The legal definition of how much can be squeezed out is becoming a political issue pulling national governments, the IMF, ECB and financial agencies into a conflict, pitting banks, vulture funds and debt-strapped populations against each other.
This polarising issue has broken out in Iceland with the country now suffering a second round of economic and financial distress stemming from the collapse of its banking system in October 2008. Stuck with bad loans and bonds, foreign investors in the old Icelandic banks and their institutional investors sold their bonds and other claims for pennies on the dollar to hedge funds commonly known as vulture funds.
At that time, Iceland’s government owned 100 per cent of all three new banks, which were raised from the debris of the old, bankrupt banks. It intended for the banks to pass on to the debtors the discount on assets they had received from the old banks. This was supposed to be what “fair value” meant: the low market valuation at that time. It was supposed to take account of the reasonable ability of households and businesses to pay back loans that had become unpayable as the currency had collapsed and import prices had risen accordingly.
The IMF entered the picture in November 2008, advising the government to reconstruct the banking system in a way that “includes measures to ensure fair valuation of assets [and] maximize asset recovery.” In fact, the government negotiated an agreement with the hedge funds which is now seen as so loose as to give them a hunting licence on Icelandic households and businesses.
These groups, viewed by some people as the scavengers of the financial system, are the bane of many states. But there is now a danger of such funds oppressing entire national economies.
Iceland’s case has a special twist. Icelandic mortgages and many other consumer loans are linked to the country’s consumer price index or, until recently, to the krona exchange rate against leading currencies. Creditors can not only demand 100 per cent of face value, but also add on the increase in debt principal from the indexing. Thousands of households face poverty and loss of property because of loans that, in some cases, have more than doubled as a result of the currency crash and subsequent price inflation. (more)
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