OECD warns Iceland on overly broad debt forgiveness

By the end of 2013, Iceland’s banks will have forgiven almost €1.6 billion in consumer debt

Iceland’s expanded debt relief programme in Iceland is targeting too broad a demographic, the OECD has warned.

By the end of 2013, Iceland's banks will have forgiven almost €250 billion kronur (€1.6 billion) in consumer debt, equal to more than 14 per cent of gross domestic product, according to estimates from the Icelandic Financial Services Association.

The unprecedented scope of the programme coincides with legal and political pressure on Iceland’s bank industry, whose €67 billion default in 2008 plunged the north Atlantic nation into its deepest recession in six decades and forced it to seek a €3.5 billion International Monetary Fund-led bailout.

Unemployment down
Icelanders in April elected a new government promising more debt relief even as unemployment falls and the economy recovers.


"General debt relief – across the board – according to the studies that we've seen, and according to figures from the central bank, would benefit families that have no financial difficulties," Patrick Lenain, an economist at the OECD, said in Reykjavik.

“In our view, the target should be families that have financial difficulties and are at risk of defaulting.”

The OECD urges a more limited approach, saying Iceland should instead raise interest rates and target relief only for financially distressed households.

The hardline taken on the banks, which also included a 2008 refusal to back their amassed debt, has so far proved instrumental in resurrecting the $14 billion economy and has been held up as a model by the IMF.

Iceland has also this week filed criminal charges against four former employees of Glitnir Bank. – Bloomberg