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.

Banks Raise Interest on Non-Indexed Loans

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All three of Iceland’s commercial banks announced that they would be raising interest rates on Friday. RÚV reports that Arion Bank, Íslandsbanki, and Landsbankinn are raising interest rates on non-indexed loans, as well as deposits. The hike comes on the heels of a 0.5% increase on key interest rates last week.

Interest rates on most types of non-indexed loans went up by 0.5% at Arion Bank, Íslandsbanki, and Landsbankinn. New non-indexed mortgages offered by Landsbankinn interest rates had a slightly lower hike; those went up 0.25-0.30%.

Read More: Inflation Rate Continues Climb, Now at 9.9% (January 2023)

Non-indexed interest rates on the banks’ home loans are now in the range of 8.0-8.5%, while interest rates on indexed loans remain unchanged.

Deposit rates were also raised, in most cases around 0.5%.

Looking Back: Mortgage Payments Continue Rising in Iceland (August 2022)

Friday’s interest increases come on the heels of the Central Bank’s decision to raise key interest rates by 0.5% last week, bringing it up to 6.5%. This was the Central Bank’s 11th increase on the key interest rate in a row. The lowest this rate has been is 0.75% in the spring of 2021.

Interest rates have not been higher since 2009.

Deep North Episode 6: Indexed Mortgages

indexed loan iceland

In the tug-of-war game between interest rates and inflation following the economic disruptions of COVID-19, Icelandic homeowners have been put under increasing pressure. We talk about a rather unique feature of the Icelandic financial system and its effects on Icelandic families.

Read more about indexed loans in our recent In Focus piece.

In Focus: Indexed Mortgages

indexed mortgage iceland

Iceland’s housing market has undergone rapid changes over the past two years, with prices shooting upward. The market has begun to gradually cool, as a result of rising interest rates, with prices stalling or even slightly lowering in some cases. While there are multiple factors that affect housing prices – including availability and a pandemic-inspired […]

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