What is actually going on in Iceland?

This is a complex, fascinating, and probably not totally reliable account, by Baldur Bjarnason, but I pass it along for its detail and numerous points of interest.  I do recommend reading the whole thing, and here is one excerpt:

Income has dropped for Icelandic households. Their debt is index-linked. The growth is largely due to a resurgence of the property bubble and return to bank growth due to index-linked loans surging upwards, i.e. households don’t benefit from it much, if at all. They can’t tap into the booming property market because they are already over-leveraged, Icelandic bankruptcy laws prevent people from walking away from their mortgages (you can’t even die away from them, if you die, your children have to pay) and the property market is largely dominated by captured money, foreign capital that can’t escape due to the currency restrictions.

That’s why I mentioned the inflation figure. When your mortgage is index-linked and your pay is static or decreasing, high inflation completely destroys whatever economic benefit your household might get from the economic growth. The prevalence of index-linked loans means that inflation has a disproportionate negative effect on households, especially compared to other countries where you can get non-index-linked loans.

The higher the inflation, no matter how much higher growth is, chances are the end result will be devastation for Icelandic households. So even if Iceland manages a miraculous 5% growth, if the underlying inflation is 10% then the result would be national economic devastation due to the fact that the majority of Icelandic loans and mortgages are bound by Iceland’s warped and eccentric variation of consumer price index-linking.

And for the same reason, if Iceland had managed 2.6% growth over 2% inflation (instead of 4%), the economic effects on household debt burden would have been different and we wouldn’t be facing as imminent a crisis as we’re facing as we head into 2013.

There is plenty of it which I cannot judge, but it is worth a ponder.

For the pointer I thank Chris F. Masse.


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