Most Significant Economic News in Iceland since the Crash. Currency Pegged Loans Illegal says Supreme Court Skip to content

Most Significant Economic News in Iceland since the Crash. Currency Pegged Loans Illegal says Supreme Court

The Supreme Court of Iceland yesterday ruled that it was illegal to peg indexed loans in Icelandic krónur to foreign currency. The ruling could have far reaching consequences for individuals and leasing companies. At this moment it is not clear what this will mean for the banks.

This ruling says that loans that were paid out in Icelandic krónur and repaid in Icelandic krónur were not legal. The two cases that the five most senior judges considered both involved leasing companies that had lent money for financing cars for individuals.

It is clear that this ruling has effect on the car-loans of thousands of individuals. It is however less clear what this means in other instances. Many individuals also got housing loans pegged to foreign currency. The reason why many wanted to do this was that interest rate on Icelandic loans was extremely high and many took loans in low interest currencies like the Japanese yen and Swiss franks.

Most companies that took foreign loans were paid out in foreign currency and those loans are not affected.

The ruling left it unclear what will happen next. The ruling did not say which interest rate should be used or whether the loans could be pegged to the inflation rate as measured by the consumer price index as most long term loans in Iceland are.

Consumers and those who had gone to near bankruptcy because of the indexation were jubilant yesterday. In some cases their loans had been doubled or more because of the devaluation of the Icelandic króna. Cars were no longer worth but a fraction of the loan given when they were bought. For example a currency loan pegged to the Japanese yen and the Swiss frank, fifty-fifty, would now stand at little more than twice the original value, if it had been taken four years ago.

All the banks issued statements yesterday. It was not clear by looking at these statements what the effect of the ruling would be for them. Landsbanki said that it was not known what the ruling would mean for its subsidiary SP-fjármögnun since it is not known how to calculate the interest. “The ruling will affect the solvency of SP-fjármögnun, but Landsbankinn still stands strong.”

The Consumer’s ombudsman Gísli Tryggvason told Fréttabladid that this ruling could serve as an example for other consumer loans.

Minister of Economics and Commerce Gylfi Magnússon said to Fréttabladid: “It is incredible that this started and that the hoard of lawyers could not make the contracts so that they were legal.” This type of indexing has been illegal for nine years. “Now we have to work with this result.” It is not clear that laws have to be changed in the aftermath of the verdict and the government has not made any such decision. Magnússon says that the consequences for the big banks will be. “For the large banks this is a certain shock but within the range of what they can take. There is greater uncertainty on what this means for the leasing companies. The greatest shock is for them,” the minister said. The minister said that he expected that ruling to have an effect on apartment loans indexed to foreign currency if they were similarly worded.

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