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.


Also not qualified to judge what's really going on in Iceland, but one thing that struck me when I was looking at the data a little while ago: GDP has made a reasonal comeback, but gross national income has plummeted and shown no sign of an upturn. In other words, they're having to work that much harder than before just to service their foreign creditors.

As to where the "Iceland is great" myths are coming from, I suspect they were instigated by Paul Krugman. He's been arguing for years that Iceland got it right and IMF poster child Latvia got it wrong (as judged by GDP rather than GNI, naturally).

Thanks, I learned something new today: the definition of Gross National Income vs GDP. But I think you got your definitions wrong, albeit I do understand your point (that GDP does not, in your definition of GNI, include servicing foreign creditors). Wikipedia: "The Gross national income (GNI) consists of: the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the indirect business taxes." Note GNI does account for net income (even if negative) from abroad. It does not account for net imports. I doubt your statistic even exists (but I could be wrong--this is not my field); but, if true, it makes a great story about Iceland vs the Latvia remedies.

Try here for the data: http://www.statice.is/?PageID=1267&src=/temp_en/Dialog/varval.asp?ma=THJ01103%26ti=Gross+domestic+product+and+Gross+national+income+at+constant+prices+1980%2D2011%26path=../Database/thjodhagsreikningar/landsframleidsla/%26lang=1%26units=Million ISK

Okay, there was some pickup in 2011 (as I said, it was a little while ago that I last looked at the numbers), but the peak to trough decline in GNI was in the order of 25%, way way worse than what GDP would suggest. Net overseas income turned much more negative from 2008 onward, which I believe happened on the receipts rather than the payments side. So perhaps the better way to characterise it is: they permanently lost a source of income as their overseas ventures went bad, and now they have to work harder (i.e. higher GDP) to just to have the same level of income (GNI) as before. Either way, if I were Latvian I wouldn't be in any hurry to trade places.

Gah, I had a feeling that link wouldn't come out right. Just go here http://www.statice.is/Pages/1267 and follow your nose.

'As to where the “Iceland is great” myths are coming from, I suspect they were instigated by Paul Krugman.'

Well, he did have a bit of help - 'I agree with much of Paul Krugman’s recent posts on Iceland, here and here. But there are neglected factors behind the Icelandic recovery, namely real shocks.

Note that Iceland is a small, open economy and fish accounts for 40 percent of Icelandic exports. It does not hurt that Norwegian cod prices have risen 20 percent over the last year; I cannot find a separate figure for Icelandic cod prices but that is a likely major factor behind the Icelandic resurgence. Here is a separate, brief report on the boom in the Icelandic fishing sector. Especially when it concerns small countries, always look first for the real shocks.'


A certain sort of scold just might note you aren't a loyal reader, but then, why would anyone want to be loyal to a blog?

They also have strengths in cheap geothermal power and tourism, which have outsize impacts on such a small population. A new aluminum plant opened in 2008, which nearly doubled Iceland's aluminum production capacity (large amounts of electricity are needed to produce aluminum). Britain is planning on building underwater power lines all the way there to take advantage of their power capacity.

Iceland also appears to have highly functional institutions, low corruption, and a cohesive society.

I think the country's fundamental strengths probably have as much to do with their rebound as any particular policy does.

And more important they didn't promulgate "too big to fail."

I'm talking further back than that: http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/ . Besides, there are plenty of people who require no 'help' in taking what Krugman says as gospel.

Well, I was pointing what Tyler Cowen wrote about how well Iceland was doing more than a year ago.

Article seems to be not particularly reliable about it's facts.

It's nonsense that you inherit debt in Iceland, you certainly do not.

Of course, if someone leaves a $100K house, with a $50K mortgate on it, you can't choose to inherit only one of those - you inherit from someones -net- worth.

But that's true everywhere. Does locations exist where, if a person dies with $1M in valuables and $500K worth of debt - then there's $1M to share among the descendants ? That'd be absurd !

So, if things where the other way around, and you were left a house worth $50K and debt worth $100K, you would inherit exactly $0 and the $50K net debt that is left will be the loss of the creditor?

Exactly. That's the creditor's loss. Giving loans to people involves risk.

The internet is your friend here. After exhaustive searching I found the universal rule that debt attaches to assets and not to heirs is respected around the world, including the USA (so you, as next of kin, don't have to pay for the deceased debts, only their property, if any, pays) but could not get any info on Iceland specifically. However, I did get information on India before 1866, and Iceland could be like India was back then: http://tinyurl.com/argu6j7

I looked at a map and I know a little bit about history, but I have NO idea how you reach the conclusion that "Iceland could be like India was before 1866".

My interpretation is thus:

The conclusion was roughly "since there's no specific data, it's possible that Iceland is like the one example I did find (India) where things were different than the general model of debt vs. property in inheritance".

On other words, a conclusion of bare possibility (due to lack of disproving data) that somehow it's like that, not that there's any special reason to believe it to be so.

(Given Prior Approval's comment below, it's wrong, but naturally that information was not available here to Mr. Lopez 45 minutes before Prior Approval posted it...)

"Does locations exist where, if a person dies with $1M in valuables and $500K worth of debt – then there’s $1M to share among the descendants"

With student loans it works that way in the US.

In most countries you can reject your "inheritance" when debt is bigger than assets, what happens in Iceland?

Well, I'll assume the link provides a reliable summary of the applicable law -

'Heirs do not become automatically liable for the debts of the deceased.

Heirs who agree on the division of the estate and who wish to undertake personal liability for the debts of the deceased may settle the estate privately. Applications for the private settlement of an estate must be submitted to district magistrates.'


As to be expected in any Western nation, debts cannot be inherited, unless the heir(s) agree. (Sadly, a decade ago, I would have been equally confident about any Western nation strictly forbidding torture, and punishing anyone committing torture, but sadly, things do change, even in a country where torture is explicitly forbidden through its constitution.)

For anyone more interested in certain aspects of this, this government link provides some text pointing out that debts are not necessarily cancelled by death, however. As an example (and please note, I am not a lawyer, this is not legal advice, I am not a resident of Iceland, and you must be at least 18 to read this comment) - if a parent and a child are living in a house with a mortgage which is solely in the parent's name, upon death of the parent, the child has no claim to live in that house without the debt being paid. Which relates to the second point above, concerning 'private settlement.'


so, the "you can’t even die away from them, if you die, your children have to pay" part is just sensationalism?

Well, sensationalism, or utter ignorance of how Icelandic inheritance works in the real world, the one where Iceland's inheritance laws are utterly and completely typical.

I am Icelandic. This post is very inaccurate and contains almost no trace of legitimate economics. I am a little surprised that you have chosen to post it...

Could you specify what "legitimate economics" is lacking in the discussion of indexing and inflation?

Are you saying that mortgages in Iceland are not (either ever, or at least commonly) index-linked or inflation adjusted?

That would be worth knowing - can you show us the data?

Conservatives told me that Iceland was doing great because they didn't bail out the banks. I wish there was some way to know the truth.

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

No truer words were ever spoken.

Why is their debt index-linked? Is this common anywhere else in the world for ordinary mortgages? If it's such a problem, could they not just fiddle the inflation statistics like other countries do?

It was my understanding that in high inflation Latin American economies last century, private debts were typically index linked. This may also have been true in Israel. A broadly equivalent strategy for mortgages is ARMs, in economies where short term interest are set at arms' length and respect the Fisher equation. Iceland is the OECD nation with the highest average rate of inflation since WWII. Hence I would expect it to be unusually sophisticated about indexation of debt.
When I was in grad school, Gene Fama's lectures accused Belgium of suppressing inflation by price controls on selected consumer goods. I would expect such behaviour in developing countries. But my impression is that Iceland is more economically honest than most.
I agree that consumer debts attach to assets, not to people. But I wish I knew more about what happens when the mortgagor of a property with negative equity dies. I also agree that the terms of a will are not binding if all heirs, by law and by testamentary provision, unanimously agree on another division of an estate. And that any heir is free to decline an inheritance, without giving a reason. Many years ago, I was an heir under a will that disinherited a relative. The named heirs all agreed to undo this disinheritance in the arithmetically obvious way.

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