With Growing Debts, Árborg Municipality Nears Bankruptcy

Selfoss - Suðurland - Ölfusá

The municipality of Árborg in South Iceland is facing financial difficulties due to inflation and a decline in real estate revenues.

Following an assessment of the municipality’s financial situation by international accounting firm KPMG, the municipal council has called a meeting with residents to discuss the town’s financial position, which is reportedly extremely challenging compared to other municipalities.

The town has taken out loans with increasing interest rates in recent years, and the council fears that they may be on the verge of bankruptcy, with a negative net worth of ISK 76,000 [$550, €509] per resident. In contrast, other comparable towns like Reykjanesbær, Mosfellsbær, Akureyri, and Akranes have positive net worth per resident.

See also: No Gender Pay Gap in Árborg

The town has been in financial trouble for a long time, with a negative net worth per resident of ISK 20,000 in 2020. The COVID-19 pandemic cannot be entirely blamed for the financial situation, but the town invested heavily in infrastructure and construction in recent years, including new schools, sports facilities, and a kindergarten, which have contributed to the financial issues. The council is concerned that they may have to resort to layoffs and selling off assets to address their financial problems.

Mayor of Árborg Municipality, Fjóla Kristinsdóttir, stated to Vísir: “I expect there will be some streamlining. Unfortunately, that’s just the way it is. But of course, we are not going to pay off the municipality’s debts by just streamlining operations. There needs to be more done.”

Árborg’s debt is approximately ISK 28 billion [$205 million, €188 million], with increasing debt-to-income ratios. The council is currently discussing possible solutions, including raising taxes, reducing spending, or selling assets. However, the town’s mayor notes that many of the investments made in recent years have been necessary due to the town’s growing population, and it is challenging to balance the needs of the community with the financial constraints they now face.

Supreme Court Takes Up Slayer Suit Against Secret Solstice Festival

slayer lawsuit secret solstice iceland

Iceland’s Supreme Court has accepted an appeal by American thrash metal band Slayer against the organisers of the Secret Solstice festival.

Slayer performed at the 2018 festival and allege that they were never paid for their performance.

In a 2020 ruling, organisers of Secret Solstice were ordered by a Reykjavík district court to pay a sum of ISK 20 million (USD 138,900; EUR 143,800) to Slayer. Despite some ambiguity in communications regarding the payment, it was determined that Slayer should be compensated with the personal assets of the organisers.

Read more: Former Secret Solstice Organiser Bankrupt

However, earlier this year, the decision was revisited by the National Court, which then acquitted Live Events, the former organisers.

With the former organisers in bankruptcy, representatives from Slayer have claimed that assets were misused during the bankruptcy, and that there is precedent for payment obligation in such cases. After the festival’s bankruptcy, it was sold to several different legal entities. Confusion arose after public statements by one of the directors of Live Events, which claimed that all debts would be settled. Now, the Supreme Court of Iceland is taking up the case.

Central to the case is whether the statement in question was general in nature, or whether it constituted a binding contract.

The Supreme Court has taken up the case partly because it believes that the case will have broader importance in setting precedent in cases of payment obligation with multiple debtors.

Central Bank of Iceland Tightens Mortgage Regulations

apartments downtown Reykjavík housing

In an effort to minimise long-term risk as well as household debt, the Central Bank of Iceland has adopted a maximum debt sevice-to-income ratio of 35% for borrowers and 40% for first-time buyers. The Central Bank lowered interest rates throughout last year in response to the pandemic recession, allowing many homeowners to refinance their debt or purchase more real estate. House prices rose as a result, and that “has gone hand-in-hand with increased household debt,” according to a statement from the Bank’s Financial Stability Committee.

Read More: Iceland’s Housing Market

The statement says that Iceland’s economic recovery over recent months has “supported household and businesses. On the other hand, asset prices – equity securities and real estate prices in particular – have risen markedly.” The position of Iceland’s three main banks is strong, with their capital and liquidity “well above regulatory minima,” making them resilient, the Central Bank says.

Icelanders’ Home Equity Has Doubled in Five Years

apartments downtown Reykjavík housing

Icelanders are taking out more mortgage loans and their collective home equity has doubled in the last five years, Kjarninn reports. This according to data recently published by Statistics Iceland.

After debt was deducted, Icelanders’ combined home equity was ISK 4.034 billion [$29.031 million; €24.959 million] at the end of last year, which is double what it was in 2015. All total, 78% of Icelandic households’ equity is tied up in real estate.

The value of real estate owned by Icelanders has also increased dramatically in recent years. At the end of 2010, according to real estate assessment (fasteignamat), the total value of Icelander-owned real estate was ISK 2.353 billion [$16.933 million; €14.558 million], whereas at the end of 2019, this total had increased to ISK 5.648 billion [$40.645 million; €34.944 million]. This is a total value increase of 140%. These valuations are, however, only based on assessment value, not market value.

Housing loans are also dramatically increasing. Icelanders’ combined mortgage debt was ISK 1.614 billion [$11.615 million; € 9,985 million] at the end of 2019, which is an increase of 141 billion [$1.014 billion; €872.377 million] from the previous year. Housing loans have increased by ISK 352 billion [$2.533 million; €2.178 million] since 2016, or 28%. By contrast, between 2011 and 2016, loans taken out by the nation’s homeowners had only increased ISK 56 billion [$403.004 million; € 346.476 million], or 4.6%.

The trend of increased debt and higher real estate prices has continued in spite of this year’s economic shocks. According to the Central Bank of Iceland’s recent Financial Stability Report (in English), total household debt in Iceland amounted to nearly 79% of the GDP at the end of June, a percentage increase of just over 2% in the last year. From 2016 and up until this year, the nation’s indebtedness has been in line with economic growth.

According to the report, “Growth in household debt is driven by an increase in mortgage loans, while other debt has contracted in real terms, as it has in the past few years. Notwithstanding the uncertainty afoot, household demand for mortgage loans is still robust, owing to falling financing costs and stable real wages despite the economic contraction. In July, net new lending to households totalled nearly 32 b.kr., about 80% above the twelve-month average.”

Icelandic households’ asset position has, nonetheless, improved. Home equity, which accounts for assets in excess of debt, increased considerably last year and is now twice as much as the GDP. Ten years ago, home equity was equal to the GDP.

Government Introduces Student Debt Relief Measures, Effective Immediately

Prime minister Katrín Jakobsdóttir introduces student loan relief.

The government is taking measures to relieve financial pressure on people repaying student loans. The new measures, effective immediately, will decrease interest on all current student loans, increase borrowers’ disposable income, and eliminate guarantor liability for as many as 30,000 defaulted student loans.

Per the terms of the bill, student loan interest rates are reduced from 1% to .4%. A discount of up to 15% will be applied to the borrowers’ loan principal upon repayment. And lastly, guarantor liability on loans that are in default will be cancelled; about 30,000 loans would qualify.

‘This has been a heavy burden’

The measures were announced in a video conference with Prime Minister Katrín Jakobsdóttir, Minister of Education Lilja Alfreðsdóttir, and Minister of Finance Bjarni Benediktsson.

“Graduated students make student loan payments amounting to three to four weeks of their yearly disposable income,” remarked Katrín. “This has been a heavy burden on those who are taking their first steps into the labour market, having children, and getting a roof over their head after the end of their studies.”

The measures also ensure that “the same conditions apply for all people who take loans with LÍN [the Icelandic Student Loan Fund],” noted Bjarni. This is to say that guarantors will not be held responsible for student loans in default. The guarantor system was eliminated for all new student loans in 2009, but guarantors on loans that were taken out prior to that were still being held accountable. This will no longer be the case.

Borrowers’ September income-based loan payments will be lower, continued Bjarni. Childless individuals earning up to ISK 700,000 a month will pay ISK 25,000 less on their income-based loan instalment. Families earning up to a combined ISK 1.4 million where both adults have student loans will pay ISK 50,000 less on their income-based instalment in September. This will impact 45,000 payers.

Measures ‘will benefit all borrowers’

Per a press release published on the government’s website on Wednesday, the measures “will benefit all borrowers, both those who work in the public and the private sectors” and “represent a fundamental change for the better to the student loan system.” They were the combined effort of a working group comprised of representatives from three government ministries, the Icelandic Confederation of University Graduates (BHM), and trade unions and are intended to facilitate wage negotiations within the labour market, as well as meet BHM halfway on their demands. “[The measures] ensure that borrowers benefit from the strong position of Icelandic Student Loan Fund, which has, in recent years, substantially increased its equity due to good [loan] recovery and reduced demand for student loans,” Lilja Alfreðsdóttir remarked.

The measures are being taken alongside those that have been proposed in a bill introduced to parliament in November—the third parliamentary bill introduced in the last seven years which attempts to revamp the terms of the nearly 30-year-old law governing LÍN. Neither of the prior bills were approved by parliament. Among the proposals in the current bill is that the name of the student loan fund be changed from LÍN to SÍN (the Icelandic Student Support Fund). Moreover, it would reward students who complete their degrees within a specified period of time with a 30% reduction of their loan principal.

Government Aims to Shut Down Microlenders

currency iceland

Most microloan companies operating in Iceland are in the ownership of a single company headquartered in Denmark, RÚV reports. This allows them to offer loans with conditions which are illegal according to Icelandic law, but not Danish. The Icelandic government and Consumer Agency of Iceland are hoping to shut down such activities, which are causing higher rates of debt, particularly among young people.

According to Icelandic law, interest and other incidental costs associated with a loan may not surpass 50% of the loan amount. Examples show some microlenders charging Icelandic consumers as much as 35,000% of the original loan amount. Two microloan companies were even declared bankrupt, yet continued lending to Icelanders through a Danish website. Since the companies are registered in Denmark, it’s more difficult for the Consumer Agency of Iceland to assist consumers who find themselves unable to pay up.

Young people affected

The number of young people in Iceland who sought professional help due to financial problems grew around 6.5% in 2018 compared to the previous year. In 2012, only 5% of individuals who sought out such services were aged 18-29. In 2018, the same age group represented 27.3% of those who sought financial help, and most stated that microloans were the main cause. Debtor Representative Ásta Sigrún Helgadóttir told RÚV there are examples of young people owing as much as ISK 5 million ($41,000/€37,000). “This is ofen a vicious cycle,” Ásta Sigrún stated. “People start by taking a loan, then they take a loan to pay off a loan.” Ásta underlined how easy it is for consumers to obtain the loans, saying no credit approval is required for loans under ISK 2 million ($16,400/€14,700).

Government takes action

A government report submitted last January suggests that much remains to be done to protect consumers and ensure fair business practices in the microloan industry. One of the suggestions made by the reports’ authors was to better regulate advertising of microloans. Minister of Consumer Affairs Þórdís Kolbrún Reykfjörð Gylfadóttir says it is not enough to inform consumers about the dangers of microloans, as there will always be individuals who take such loans out of necessity. Þórdís plans to introduce a bill this fall banning microlenders from offering loans whose incidental costs are illegal according to Icelandic law. She hopes the bill will make business unfeasible for the microlenders, causing them to shut down.

Going to court

Hákón Stefánsson of Creditinfo Group says the easiest way to bring microlenders’ operations to a halt would be for debtors to take them to court. As of the present, no microloan debt cases have been put before Icelandic courts. Hákón believes the companies’ would not be able to defend their case before the courts.

Treasury Debt Falls by ISK 88 Billion

Treasury debt has fallen by over ISK 88 billion ($809m/€710m) over the past 12 months, Morgunblaðiðreports. In April 2018, Iceland’s treasury debt amounted to ISK 866 billion ($8b/€7b), or around 32% of GDP.

“This is largely explained by the sale of the state’s share in Arionbanki bank and the payment of government bonds due to Arionbanki,” stated Minister of Finance Bjarni Benediktsson. “We have used these funds to settle debts, in addition to lowering the government’s credit balance at the Central Bank of Iceland.”

Over the past 12 months, the Central Bank of Iceland has bought back bonds issued in 2008 to refinance banks after the banking collapse.

Moddy’s Investor’s Service changed the Government of Iceland’s sovereign rating outlook to positive from stable last month, citing the lowering of government debt and the country’s improving economic resilience as the reasons behind the change.