Grein mín sem birtist í The Irish Times í morgun:
Debt forgiveness?
News out of Ireland report that some prominent people suggest that the government should take the route of Iceland and introduce wide-scale debt forgiveness programs for struggling mortgage holders. It is estimated that the exercise could cost the Irish tax-payer up to €6 billion. It is pointed out that if the much more troubled Iceland can do it with the blessing of the IMF, Ireland can certainly follow suit. But is that really so?
An unprecedented event occurred in Iceland in October 2008: the country’s financial system totally collapsed and in its wake the national currency. The failure of Lehman Brothers in mid-September 2008 created extreme levels of mistrust in the international financial community. In this brutal aftermath, almost all the all financing lines of Icelandic banks were cut and they were left facing severe liquidity problems. The typical policy response to a systemic crisis such as this—to use the central bank as a lender-of-last-resort—was not possible, as the funding needs of the banking system dwarfed the capabilities of the Central Bank of Iceland. The central banks’ foreign reserves amounted to about half the country’s GDP, while the consolidated balance sheet of the banking sector was roughly ten times GDP. The consequent systemic failure led to the three system banks being put into a resolution process and new ones established by Icelandic authorities.
The plan devised in the days that followed detailed how the banks would be taken into public ownership one-by-one. It was decided that a blanket guarantee should be given to domestic depositors in local banks and that other depositors should be first in line as claimants on the assets of the banks. In each case, the restructuring involved the creation of a new bank, which held all deposits guaranteed directly by the sovereign. A preliminary evaluation of the assets was carried out, and assets amounting to deposits moved from the old banks to the new ones. In the evaluation the assets were valued considerably lower than nominal value as the loan portfolios of the banks deteriorated considerably during the collapse. It is estimated that the write-offs of the total portfolio were more than 50 per cent of nominal value. Mortgage loans were valued at approximately 70 per cent, primarily due to the fact that their principal had increased significantly in value due to either inflation or the fall of the national currency. The residual was left with the owners and the bond holders of the banks.
By the fair assessment of the banks’ assets they were given space to restructure their loan portfolio. At first the idea was to evaluate the payment capacity of each household but it soon became apparent that the resources of the banks were insufficient and it would take too long – meanwhile the loan portfolio would deteriote further. Eventually the government initiated, among other measures, a uniform debt relief program that the banks agreed to. The program will write-off home loans in excess of 110 per cent of the property for those who apply for it.
It is apparent the initial bond holders will carry most of the debt relief costs in Iceland. The proposals in Ireland on the other hand suggest that the Irish tax-payer takes the bill. With the current state of Irish government finances it is very difficult to imagine that a uniform debt relive program would be a vise move. However, if the bondholders would accept debt restructuring (as I think they should as it would preserve the willingness-to-pay of Irish households) the ‘Icelandic-model’ could then be used in Ireland.
Tryggvi Þór Herbertsson