STOCKHOLM Nov 30 Iceland said on Saturday it
would launch a mortgage debt relief programme worth about 150
billion krona ($1.26 billion), in a move that could hurt its
credit ratings and which critics say could scare off foreign
Iceland is slowly recovering from its deepest ever financial
crisis, but many households are saddled with mortgages they
cannot afford to repay, squeezing consumer spending and economic
"The plan will assist over 100,000 households," Prime
Minister Sigmundur Gunnlaugsson said. "This will be the
beginning of an economic renaissance."
Debt relief will apply to some 1.36 trillion krona in
mortgages linked to inflation, with a maximum limit of 4 million
krona per household and totalling around 80 billion krona over
the four-year period of the programme.
Mortgage holders will also be given tax breaks to encourage
them to use pension savings to pay down their borrowing, a
measure worth about 70 billion krona.
A centre-right coalition of the Progressive Party and the
Independence Party won an election earlier this year on a
promise to reduce the financial burden on households after years
The government said it would finance the measure through tax
hikes on financial institutions and a haircut on around $4
billion in debts owed to overseas investors in Iceland's failed
banks, which collapsed in late 2008.
Those debts are now mainly held by hedge funds, which bought
them at a deep discount.
"The net impact on the Treasury is expected to be
insignificant each year during the period 2014-2017," the
Iceland's financial system and currency collapsed in late
2008 and it was bailed out by international lenders. It exited
that programme earlier this year, but growth remains sluggish
and inflation well above the central bank's target.
Households, corporations and the government are saddled with
heavy debts, and capital controls, imposed at the height of the
crisis, are crimping investment.
Writedowns of mortgages linked to foreign currencies and
other measures have already cut household debt levels by around
200 billion krona - nearly 12 percent of 2012 GDP - and the new
measure will be worth an additional 9 percent of output.
However, rating agencies and the IMF have warned that with
Iceland's economy still sluggish and government finances weak,
there was little room for new debt relief measures.
Rating agency Fitch estimated that the government will run a
deficit of around 3 pct of gross domestic product this year.
In July, S&P said it could downgrade Iceland's BBB- rating
if debt relief weighed heavily on government finances.
S&P also said a haircut imposed on foreign creditors could
damage the willingness of investors to put money in Iceland.
Such a move, however, would be a further step towards the
removal of capital controls, reducing the possible outflow of
krona when the controls are eventually lifted.
($1 = 119.6300 Iceland kronas)
(Reporting by Simon Johnson; Editing by Hugh Lawson)