The International Monetary Fund’s mission chief to Iceland contends that the Prime Minister’s debt relief package is “ill-advised”.
Bloomberg reports that Daria Zakharova, the IMF mission chief in Iceland, is worried Prime Minister Sigmundur Davíð Gunnlaugsson’s proposal could put greater stress on the Housing Financing Fund (HFF), which is already struggling to maintain solvency.
“The household debt relief program will increase risks related to the HFF, because it will increase prepayments of mortgages held with the HFF,” she said. “This will further aggravate its negative carry and it will require increased capital injections from the budget.”
As reported, the debt relief package takes a two-prong approach: 80 billion ISK of household debt will be immediately canceled. This money will come from an increase on the estate tax of the old management of Iceland’s banks. This tax will be collected over the course of the next four years, and the government estimates enough revenue will be generated to cover the debt relief. Another 70 billion ISK will come from allowing people to use their own tax-free, private pension holdings to pay down their debts – in effect, paying the debts themselves.
Zakharova argues that “across the board debt relief for households is ill-advised and that a better use of any new revenue, including in this case from the new bank levy, would be to lower the still-high public debt. … If the levy on the banks proves unworkable, the government may find it difficult to unwind the debt writedowns. And this could eventually increase public debt.”