Economist: New debt writedowns would help Iceland growth

Icelandic-money-02Iceland’s banks must continue writing down household and corporate debt to boost its economic recovery, a leading Reykjavik University economics professor has said.

Prof. Friðrik M. Baldursson said the banks need to write off more debt to enable the country’s economy to maintain its pace.

The North Atlantic nation’s economy is outpacing that of the Eurozone, with GDP increasing by 4.9 per cent year-on-year in the third quarter, in comparison with a contraction of 0.4 per cent in the Eurozone.

Iceland’s banks have already written off around $2bn in debt since the economic collapse in 2008, the Financial Services Association estimates. That’s 14 per cent of GDP – higher than any other country write-offs in the world. The government announced proposals to reduce household debt by some 150bn krónur ($1.29bn) in November.

It aims to provide homeowners with up to 80bn krónur in writedowns of home-loan debt and 70bn kronur in tax redemptions in the coming three years. The initiative, which is to come into force later this year, equates to nine per cent of the country’s $14bn economy.

Friðrik Baldursson said sustained growth of between four and five per cent is unlikely, noting however that it may not be a good thing as it could lead to rising inflation.

In October, Iceland’s central bank Seðlabanki said the country’s businesses had too much debt, despite restructuring measures limiting their capacity to invest. In June 2013, corporate debt equated to 154 per cent of GDP and banks faced the likelihood of losing 12 per cent of company loans.