IMF frowns at Iceland debt write-off plan

icelandic-money-03A plan to ease mortgage debts of every household in Iceland through a write-off has been criticised by the International Monetary Fund (IMF). An announcement on Saturday by the new government that it would follow through on its promise to ‘erase’ 150 billion krona in debt has been met with scepticism by international financial institutions.

Progressive Party Prime Minister, Sigmundur Davíð Gunnlaugsson, promised the relief during his April election campaign and now intends to implement a plan that would save each household the equivalent of 24,000 euro on their mortgage repayments. However, he gave no details on how the government intends to finance the plan.

He initially suggested foreign creditors, many who have assets frozen in Iceland following the 2009 financial crash, would have to bear some of the of write-off costs. The program would take four years.

The IMF believes that Iceland has: ‘little fiscal space for additional household debt relief’. The Organisation for Economic Co-operation and Development (OECD) put out a more measured solution, calling for relief for low-income households only.

Since taking office, the Progressive Party has made several controversial moves in a bold attempt to free Iceland from the strict fiscal disciplines imposed following the credit crunch, and EU and international creditors have been watching nervously.

Recently Standard & Poor’s financial services company slashed the outlook for Iceland’s long-term credit rating to negative from stable on anticipation of the news and hinted that it could be lowered further.

Borrowing costs skyrocketed in the wake of the financial crisis, and mortgage debt has gotten out of hand following the collapse of the krona, leaving many Iceland families mired in insurmountable debt.

“Currently, household debt is equivalent to 108 percent of GDP, which is high by international comparison,” the government said. “The action will boost household disposable income and encourage savings, with relief beginning in mid-2014,” it added.