a british bank, not an icelandic one.

The loans are indexed to

inflation or a foreign currency. This is far more complex than it looks. The model used for the indexing does not reflect the inflation correctly

and the compounding effect of this is enormous for the debtors.

The use of this indexing model has been eating up families’ properties

leaving 20 to 40% of them with negative equities.

Hmmmm. Wonder if we’ll do that

when (and if) we introduce regulations? Somehow it seems just too much like common sense and wanting to do something to protect ourselves from

bankers.

you for this very good article.
I have one point to add to the comments of Erlendur here above. He is absolutely correct, but the fact was that

(at least for “average Joe” customers) there were only two options for loans on residential property.
Option a) being the index-linked loans,

option b) being the foreign currency-linked loans. The forex-linked loans were particularly pushed for residential property and car loans and re-

financing of such loans.

The option of an Icelandic currency loan without index-linking was simply not available for residential property (I

hunted high and low for such loans all over a couple of years back) but often available for other loans.

The option for someone trying to

avoid index-linking was therefore only to link to currency instead.

As a final point, yes the deflation would lower the principal, (creating

an odd pressure into a risky state) good in small doses of course. However apparently it can never (anymore – I am told this was different in older

loans) go lower than initial principal sum. Creating of course the obvious balance towards the benefit of the creditor, who can only ever win.

The loans are indexed to

inflation or a foreign currency. This is far more complex than it looks. The model used for the indexing does not reflect the inflation correctly

and the conpounding effect of this is enormous for the deptors.

The use of this indexing model has been eating up families’ properties

leaving 20 to 40% of them with negative equities

check this.”

Wrong, for example Kaupthing had a Aa3 rating from Moodys.

“In a bid to lower employer costs, people have had 2 working

hours cut each week.”

Wrong, there has been no general agreement to cut work time.

Stefan Olafsson, who is a professor of Sociology,

not economics is a controversial pundet in Iceland, so using him as a main source for you artical is questionable.

languages, prevents spelling based misunderstandings since four different spellings of the same name can confuse people a lot. So it just comes

down to taste

But concerning the indexing, if deflation occurs, such as in March of this year, the principal is cut, as was done in this

case, by 0.6%. So if Iceland would a long period of deflation, these loans could be cut a considerable amount.

Alex, the rationale behind

the indexing of the loans (and long term deposits, min. 3 yr binding) was to reduce uncertainity of the value of money, i.e. the Icelandic króna.

Iceland has historically had very high inflation, so this was done to counteract the effects of the inflation.

Thank you very much for these corrections. But surely the genitive – the daughter of – would

be appropriate here? Or is just not used, with the inflexion preferred?

On the point about indexed loans….Does this means that when

deflation occurs, the principal owed to the creditor is cut, in line with the rate of deflation?