Analysis: Supreme Court rules on interest for Iceland foreign currency loans

The Supreme Court of Iceland has confirmed the decision of the Reykjavik District Court that foreign currency indexed loans (ruled illegal earlier this year) should now be charged the Central Bank of Iceland interest rate for non-inflation indexed domestic loans.

The case centred purely on a foreign currency indexed car loan franchise issued by Lysing in 2007 and what rate of interest should be applied now that the original loan contract has been deemed illegal. The Reykjavik District Court decided that the rate should be the same as that for non-inflation indexed krona loans, which have averaged 15 percent APR since 2006. The debtor’s plea in court was that the contractual interest rate should apply – which is much lower. Debtors were happy about the original loans being made illegal, because since the collapse of the Icelandic krona, repayments in foreign currencies have become extremely expensive – despite the low rate of interest. After all such foreign loans were converted to Icelandic kronur, it then fell to the courts to decide how much interest to charge.

Although a very small case, yesterday’s court ruling is a precedent and will likely prove extremely important for the entire financial system in Iceland.

Consumer groups are not happy with the decision, as they hoped the lower rate of interest would apply. However, government sources are pleased with the outcome, pointing to the fact that ratings agencies like Moody’s and Standard and Poor’s downgraded Iceland’s ratings over the potential costs involved with changing foreign currency indexed loans. It is considered likely the country’s sovereign debt rating will improve as a result of yesterday’s ruling, which makes a second wave of extreme pressure on the Icelandic banks less likely.

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