Stephen Cook: The Story on Iceland’s ‘Mortgage Forgiveness’

Updated: The  Story on Iceland’s ‘Mortgage Forgiveness’

In the interests of credibility and transparency here at the 2012 Scenario, I have pursued this story as far as I can.

It seems, at this point in time – and despite much positive stuff that is indeed underway and has been achieved in Iceland in terms of managing debt and beginning on a new path – actual mortgage forgiveness has not been one of them. No matter how much we (and, no doubt, the citizens of Iceland!) may have wanted it to be.

Below is a series of email communications which have taken place since my previous post. They are between myself and Mr Steindór Jónsson of the Iceland Ministry of Economic Affairs. As you will see, he states clearly (now he has seen it) that the original Telesur TV video story which seems to have sparked everyone’s excitement is “a false report”.

For the record, these are our emails in chronological order:

This first response is to me saying that the first IMF document he provided in answering my original request didn’t give a definitive answer or talk about mortgage forgiveness:

1. The IMF report gives a good overview of Icelandic debt restructuring efforts in international comparison. An alternative, but less comprehensive, review can be found on page 57 of Iceland’s Pre-Accession Economic Programme 2012, which can be read online:

Steindór Grétar Jónsson
Sérfræðingur / Specialist
Efnahags- og viðskiptaráðuneyti / Ministry of Economic Affairs
Skuggasundi 3, 150 Reykjavik, Iceland.

If you wish to read it the linked document above, you will find that it does have lots of good stuff in it – but no mention of ‘mortgage forgiveness’.

2. Thank you again Steindor. I will read this document. But is there a simple ‘yes’ or ‘no’ that you can give me as to whether Iceland has organised for mortgage forgiveness for its citizens? Obviously, this is such wonderful news, if true? – Stephen


There is no simple yes or no answer. There are debt relief measures in place, which were negotiated between the government and mortgage lenders. Some of the measures, including an increased tax rebate, are for all mortgage holders, while others are only for the ones in the most financial distress.
Steindór Grétar Jónsson etc


3. Thank you. I see what you mean. But do you believe ANY of Iceland’s citizens have been granted complete mortgage forgiveness – and if so, how many. There was a story that appeared on many websites around the world a couple of weeks ago that came originally from Telesur TV, which was subtitled in English that said this was the case. This is the story: I just wondered if this was true? – Stephen


I can assure you this is a false report. I don’t believe any Icelandic citizen has had his or her mortgage completely written down, unless it’s a case of bankruptcy or some extreme outlier (I assume this is a typo and he means “other”) case.
Steindór Grétar Jónsson etc

So that’s the official word.

Steve Beckow was also kindly sent a link by Erica L to this blog by UK-based Icelandic blogger Olafur Margeirsson. Olafar is currently a PhD student at the University of Exeter, UK, researching financial instability.

As you can read, he also states:

“tkn” asked me in a comment to How to create a housing bubble? whether it was true that the Icelandic households had had their debt forgiven in any major amount. This is, unfortunately, not true.

So, for the moment, that’s as far as I can go. And sadly it seems it’s “no” on mortgage forgiveness in Iceland at this point in time.

Here’s the original post from May 3, 2012:

What’s the REAL Story With Iceland’s ‘Mortgage Forgivenes’?

Since we first heard the ground-breaking ‘news’ about Iceland’s ‘mortgage forgiveness’, both Geoffrey West from Cosmic Vision News (InLight Radio – Fridays, 4pm PDT) and I have been trying ascertain its credibility.

As I’m sure you’d agree,  if this story is true, it is sensational news! It signals the beginnings of the introduction of the new global financial system. Which is why Geoffrey has been hoping to interview someone who has been involved in this decision – or been positively affected by it – on CVN.

But it seems that the video Steve Beckow posted here on April 13 – – which came from Latin America’s Telesur TV (, could well be the basis for every other story we can find online. Plus, we can’t find a single mention in any mainstream TV, radio or newspaper outlet.

Could the lack of available verification and media coverage simply be a strategic ploy to ensure that the rest of the world doesn’t know about this incredible step towards a new financial system – just in case the people of the world demand the same? Maybe. Or it is simply wishful thinking on Telesur’s part? Or do they know something we don’t – yet?

In an effort to find out if this story has legs, I wrote to the Icelandic Government in mid-April and asked: “Could you please tell me, has your government worked with the banks to forgive the mortgage debt of your citizens?”.

Today – some two weeks after I wrote – I got this oddly non-definitive response:

Mr. Cook

A good review of debt restructuring in Iceland and other countries can be found in Chapter 3 of the IMF’s April 2012 World Economic Outlook. It can be read here:

Steindór Grétar Jónsson
Sérfræðingur / Specialist
Efnahags- og viðskiptaráðuneyti / Ministry of Economic Affairs
Skuggasundi 3, 150 Reykjavik, Iceland.

“OK”, I thought, “I wonder what the link Steindor has included will tell me?”. Mind you, I did think it strange that he was sending me to the International Monetary Fund website. But I immediately clicked through anyway – to find this:

WORLD ECONOMIC OUTLOOK Debt Holds Back Recoveries but Restructuring Can Help

IMF Survey online

April 10, 2012

■ Research finds housing busts and recessions preceded by larger household debt buildup are longer and deeper

■ Combination of household debt and house price declines governs recession’s severity

■ Bold debt restructuring programs can reduce defaults and foreclosures

The more households accumulate debt during a boom, the deeper the subsequent slump in the economy and the weaker the recovery, according to new IMF research.

“Dealing with Household Debt,” published in the April 2012 World Economic Outlook, finds that housing busts preceded by larger runups in gross household debt—mortgages, personal loans, and credit card debt—are associated with significantly larger contractions in economic activity.

Household consumption and real GDP fall substantially more, unemployment rises more, and the reduction in economic activity persists for at least five years. A similar pattern holds for recessions more generally: those preceded by larger increases in household debt are more severe, according to the study’s statistical analysis.

This is sobering for economies today, such as Iceland, Ireland, Spain, the United Kingdom, the United States, and others, where house prices collapsed during the Great Recession and the substantial amount of debt racked up during the boom became a burden holding back the recovery.

Potent combination

Household debt soared in the years leading up to the Great Recession. When house prices fell at the advent of the global financial crisis, many households saw their wealth shrink relative to their debt. Combined with less income and more unemployment, that meant it was harder for many people to make their mortgage payments, and defaults and foreclosures became endemic in some countries. Household deleveraging—paying off debts or defaulting on them—has begun and is most pronounced in the United States.

The study looks at the relationship between household debt (and deleveraging) and economic activity. It finds that larger declines in economic activity are not simply due to the larger drop in house prices and the consequent reduction of households’ wealth. Indeed, household consumption falls by more than four times the amount explained by the fall in house prices in high-debt economies. It seems to be the combination of house price declines and prebust household indebtedness that accounts for the severity of the contraction.

Nor is the larger contraction in the economy simply driven by financial crises. The research finds that the relationship between household debt and the contraction in consumption holds even for economies that did not experience a banking crisis around the time of the housing bust.

The study includes case studies of how governments have responded during episodes of household deleveraging—in the United States in the 1930s and today; Hungary and Iceland today; Colombia in 1999; and three Scandinavian countries (Finland, Norway, and Sweden) in the 1990s. In each case a housing bust was preceded by or coincided with a substantial increase in household debt.

Monetary easing, fiscal transfers effective tools

The study reviews the government policy responses to household debt in each of these cases and concludes that macroeconomic policies are a crucial tool to prevent contractions in economic activity during periods of household deleveraging.

Monetary easing in economies where mortgages typically have variable interest rates—in the Scandinavian countries, for example—can quickly reduce mortgage payments and avert household defaults.

Fiscal transfers to households through social safety nets can boost households’ incomes and improve their ability to service debt; again, this happened in the Scandinavian country cases. Such automatic transfers can further help prevent self-reinforcing cycles of rising defaults, declining house prices, and lower demand.

Macroeconomic stimulus, however, has its limits. Nominal interest rates can only be cut down to zero, and high government debt may constrain the scope for fiscal transfers.

Debt restructuring to avoid foreclosures

Government policies aimed at reducing a household’s debt relative to its assets—and its debt service payments relative to its income—could be an inexpensive way to mitigate the negative effects of household deleveraging on economic activity. Such policies are particularly relevant for economies today that have limited scope for expansionary macroeconomic policies and in which the financial sector has already received government support.

Bold and well-designed household debt restructuring programs such as those implemented in the United States in the 1930s and in Iceland today can significantly reduce the number of household defaults and foreclosures. That helps prevent downward spirals of declining house prices and lower demand. Once the mortgages are restructured to be more affordable, their market value rises, and the government can sell them, using the revenue to offset the initial cost to the taxpayer.

But these programs must be carefully designed. If access to them is overly restrictive, they will not have the full intended impact. And if they are too broad and imposed on an already fragile financial sector, they can cause a dangerous credit crunch.

Sadly, as you can see, it is a generic story about the IMF’s own research into household debt in several countries. Yes, it nicely and neatly mentions Iceland (second line, second-last paragraph)). But it still does not give a simple ‘yes’ or ‘no’ answer to what Iceland has – or hasn’t – done. Which, in itself is possibly, oddly re-assuring…

Geoffrey’s take on it was this: “It seems that they are still trying to send the ‘party line’ to the world, via the IMF (lender of last-resort, that is currently begging for money itself) as though they do not want the world to know yet that they are setting up the model economy”.

I have written back to Mr Jónsson today, posing my question again:  “Has the Icelandic government brokered a deal whereby it has been able to ensure that the mortgage debt of residents has been forgiven?”

Let’s see whether I get a simple ‘yes’ or ‘no’ this time…

P.S. Meanwhile, if you know anyone in Iceland who can tell us what’s going on, we’d love to hear from them!

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