New Mortgage Crisis in Iceland: Could U.S. Be Far Behind?

Posted by: asiablues Post date: 10/23/2010 – 20:48 Some scary developments in Iceland including a 41% inflation in the past three years, 63% of mortgage is underwater, and 40% of homeowners are insolvent make me wonder how far behind is the United States? Gulf Oil Spill: Mission Accomplished or Ongoing Crisis? Posted by: George Washington Post date: 10/23/2010 – 20:07 Mission accomplished … wait, WHAT??? Navigation PollsDonate To Zero HedgeRecent posts Shopping cart View your shopping cart. User login Username: * Password: * Create new accountRequest new password Zero Hedge Reads Angry BearBearish NewsBoom Bust BlogChina Financial MarketsChris Martenson’s BlogContrary InvestorCoyote BlogCredit WritedownsDaily CapitalistDaneric’s Elliott WavesDealBookDealbreakerDr. Housing BubbleFalkenblogFibozachiFund My Mutal FundGains Pains & CapitalGlobal Economic AnalysisGonzalo LiraImplode-ExplodeInfectious GreedInvesting ContrarianJesse’s Café Américain Market FollyMax KeiserMinyanvilleMises InstituteNaked CapitalismOf Two MindsOilPrice.comPension PulseShanky’s TechBlogThe Daily CruxThe Mad Hedge Fund TraderThe Market TickerThe Technical TakeThe Underground InvestorWall St. Cheat SheetWashington’s BlogWealth.netWhen Genius Prevailed Home asiablues's picture Submitted by asiablues on 10/23/2010 20:48 -0500

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By Dian L. Chu, Economic Forecasts & Opinions

The Icelandic financial crisis has been ongoing since 2008 when all three of the country’s major commercial banks collapsed after they failed to refinancing their short-term debt and a run on deposits in the U.K.

In July, I talked about how Iceland is totally not a post-crisis miracle as Paul Krugman claims, but just how are things now with Land of Fire and Ice?  

Scary Economic Numbers

Some of the scary economic figures, courtesy primarily of the plunging Icelandic króna:

Inflation has soared 41 percent from January 2007 through September this year (see screen print from Bloomberg) Real disposable incomes slumped 20.3 percent last year Real wages fell 10.1 percent from the beginning of 2007 through August this year 63 percent of the nation’s mortgage is underwater 40 percent of homeowners are “technically insolvent”

$2 Billion Mortgage Write-off – Who Will Pay?

Bloomberg (clip below) reported that Iceland government last week proposed a debt relief bill to write off up to 220 billion króna ($1.99 billion) in mortgage loans. This is after about 8,000 protesters gathered outside parliament demonstrating their anger over rising homeowner insolvencies.

?Most of Iceland’s mortgage debt is inflation-linked.  So, what that means is that the principal has gone up 41% in three years, while everything from wage, income to real purchasing power has gone the opposite direction.

This debt relief sounds all nice and dandy, but the problem is a write-down of almost $2 billion is equivalent to about 8 percent of total assets at Iceland’s three biggest banks, their 2009 balance sheets show. 

Moreover,  Iceland’s pension funds, which hold most of the bonds behind the nation’s mortgage debt, said they will try to block proposals.  If the banks are forced to take a flat write-off, the government most likely will need to cover the loss of pension funds, i.e. taking on more debt. 

Iceland, Ireland & Japan – Default Inevitable?

Separately, a WSJ article noted that during a speech at the Value Investing Congress in New York, Kyle Bass, head of $900 million hedge fund firm Hayman Advisors, says,

Iceland had sovereign debt of roughly 35% of its GDP. However, the country’s three largest banks amassed roughly $200 billion of assets — 10 times the country’s GDP.   When the financial crisis hit and Iceland had to bail out its banks, the country’s sovereign debt ballooned. 

According to Bass, right now, in terms of the size of banking systems relative to GDP. Iceland and Ireland are top of the list, thus post the highest sovereign debt risk.  Ireland’s on balance-sheet obligations are about 85% of GDP, but the country’s bank bailout program is another 50% of GDP. 

Meanwhile, Bass also warned that Japan may default in coming years. He said From 1989 to 2009, government debt grew 137%.  But since Japan’s interest rate is close to zero (so is the United States), it will be getting more difficult to pile on debt without incurring higher interest payments, and increasingly will need to go abroad for financing.

Bass estimated Japan is currently paying about 9.5 trillion yen in interest. Every one percentage point increase in the interest rate increases Japan’s interest payments by 10.5 trillion yen. 

Currency Debase – No Solution to Debt

Since this season is all about currency war to prop up economies, there’s an increasing chorus from Washington to famed economists believing that the U.S. will become more competitive, thus creating more jobs, through massive dollar devaluation (50%) or wage deflation (the two are one of the same, in my opinion).

Chart Source: Google Fiance

Well, we may take a look at Iceland to test that theory. 

Iceland’s currency has devalued almost 60% since July 2006 (see chart), wages also fell, and aside from IMF’s loan, Iceland’s been held together mostly by “technical defaults” and capital control. 

While the currency devaluation might have helped the nation’s export (while forcing debtors taking haircuts), the domestic inflation, and asset devaluation, most likely will wipe out the entire middle class (hence the “Angry Icelandic 8,000”).

United States Not Far Behind?

Due to its size, massive resources and different macroeconomic makeup, the United States, although inching closer to Iceland, Ireland and Japan, in terms of debt levels, housing, mortgage and banking bust, has not quite fallen into the similar trap yet.

Nevertheless, US Federal debt is around 94.27% of GDP as of October, 2010, up from 57% just ten years ago.  CBO projected U.S. debt would reach 100% of GDP within a decade (the next five years seems more likely the way it’s going).

Meanwhile, by observing crisis unravel in countries with fiscal situations not that different from the U.S. hopefully would serve as a warning and prophecy of things to come.  Whether the prophecy will be fulfilled is yet to be seen.

Dian L. Chu, Oct. 23, 2010

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by litoralkey
on Sat, 10/23/2010 – 21:16

There is a pretty large condo development on the docksides that have the smallest housing units in the country… and were being sold at prices similar to Oslo and Copenhagen… Worst design you’d ever see…. all units are empty, eventually will be torn down…


Empty Shell

Magnus and Drifa outside their home in the suburb of Ulfarvatn. Promised to be a prominent and well to do suburbia, nowadays is like a ghost town with unfinished homes. Out of the expected 6.000 only a handful of people is living here. Ulfarsvatn.



Login or register to post comments by jeff montanye
on Sat, 10/23/2010 – 23:03

aren’t there places in china and the u.s. like that?  seems i saw on youtube….

Login or register to post comments by StychoKiller
on Sat, 10/23/2010 – 23:14

Moreover,  Iceland’s pension funds, which hold most of the bonds behind the nation’s mortgage debt, said they will try to block proposals.  If the banks are forced to take a flat write-off, the government most likely will need to cover the loss of pension funds, i.e. taking on more debt.

Again, someone wanted free lunches!  Sorry folks, but the results of Socialism seem pretty universal to me:  Everyone becomes “Equally” poor!

Login or register to post comments by Oracle of Kypseli
on Sat, 10/23/2010 – 23:34

The word  “Equally” brings the below thought:

To be politically correct, you must hate everyone “equally”.

Login or register to post comments by GoinFawr
on Sun, 10/24/2010 – 00:39

Quack quack, “.. someone wanted free lunches!” Quack quack quack, “…but the results of Socialism seem pretty universal to me:” quack quack quack quackwiwy quack.

Ronald Reagan’s ghost called: he wants his broken record back.

Norway contradicts you.

Sweden contradicts you.

Finland contradicts you.

Good luck with that whole ‘witless loyalty’ meme.

Iceland was robbed by the same greedy graspers blagging you to this day. Icelanders made the correct decision and told them to go f themselves, unlike the US which continues to gently stroke them by squeezing Americans for generations to come. At least Icelanders are now in the process of picking up the pieces, the worst is yet to come for you (if you’re American).

Yah, I’d tap out now too if I were you.

Login or register to post comments by AnAnonymous
on Sun, 10/24/2010 – 05:46

An excellent post which sums the story pretty well and the destined shallow economics science.

Capitalism is everything and anything that works and the rest what loses. There is no other shared definition of capitalism.

Now Iceland is relabelled a socialist country whereas shortly before the crisis, when everything rolled on, they ranked high on capitalistic ladders. Their successes were due to free entrepreneurship high density, low corruption etc.

Their little ponzi scheme comes to maturation and as fast as that, they suddenly become socialist.

The fact is that Iceland has started an expansion course and that expansion is running its natural course.

Instead of sticking to the fact, there is now a new class of ideologues (economists, traders…) closer to priest class, just living as well as the priest class in old times and selling their propaganda.

The priests sold that the Earth was flat, the Sun revolved around the Earth, people used to live millenia etc… They enjoyed what the society of their times had best to offer. They lived better than a today bum who knows that the Earth is rounder than flat, Earth revolves around the Sun, people cant live millenia…

The priests sold the same scam. When everything goes fine, that is because you showed the due respect to their god. You are a capitalist. When stuff turned sour, you no longer showed the due respect to their god. You’ve become a socialist.

Wooooo, and millions of people around the world make heaps of money thanks to that. Selling to everyone they deserve, that they deserve even more than anyone else what they get out of society.

Login or register to post comments by Oracle of Kypseli
on Sat, 10/23/2010 – 23:41

The smaler the country, the more apparent the reality that government can not fix things. “Zero sum game?”

The larger the country, the longer the extend and pretend can go on. But, when the inevitable default comes. Turn off the lights world.

If you have children, teach them to grow food, fish and brake everything that requires batteries.

We just got our own little plot in the Andes

Login or register to post comments by wintermute
on Sun, 10/24/2010 – 05:10

Absolutely. Size of economy only increases the timescale from boom to collapse. It does not change the mathematics. The advantage size has is that lessons can be learned.

Confucius said that an intelligent man learns from his own mistakes, but a wise man learns from the mistakes of others.

It seems that few of the US politicians are wise.

Ron Paul is wise – but can he get the power needed to go with it?

Login or register to post comments by tim73
on Sun, 10/24/2010 – 00:16

Well, Iceland will say eventually, “Talk to the fishes, we don’t pay, now get the hell out of my island!”. Defaults are nothing new, in matter of fact sometimes necessary for a country. With Iceland more than necessary, 10 times of GDP is simple unpayable. Then 10 years later few remembers (like with Russia…) and economists are all excited about the new “miracle” growth of that country. 

Login or register to post comments by RockyRacoon
on Sun, 10/24/2010 – 00:21

Time to continue the retrenchment.  Gotta get some more gold.

Login or register to post comments by Akrunner907
on Sun, 10/24/2010 – 01:37

Overall debt/GDP is important, but what is more pressing and more of a causation for failure is the debt service/tax revenue.  Debt service/tax revenue has a greater impact on the economy as it has a ripple effect on the 70 percent of the economy that is based on consumer spending – especially when you add the governmental spending as another consumer.  The government spending levels are no different than what ever American goes through when they have a budget; unfortunately, the average American does not have an employer they can go back to time and time again and ask for a raise and get it.  



Login or register to post comments by hooligan2009
on Sun, 10/24/2010 – 04:51

Very good point! Of course, regulated fed interest rates also hide the truth. Who would have thought that we would live in such times, where the Fed set all interest rates, regardless of credit and yield curve risk or supply/demand! Communist Russia maybe, or Poland before Solidarnosc.

Here’s a table of total tax take to GDP over time:

Note how, since the Fed “popped the internet bubble” in 2000, US taxes dropped from a peak share of GDP of 20.6% to just 14.8% in 2009, with the same 14.8% projected for 2010 (right down at the bottom right).

Income taxes dropped from 10.2% of GDP in 2000 to 6.4% (a 37% drop) and corporate taxes dropped from 2.1% to 1.0% (a more than 50% drop).

Just to put the US tax take in the context of other countries and to reflect the impact of political society from the perspective of others, here’s a comparison per country.

Note Europe @ c.40% tax take to GDP and the US @28%, over 2007/8/9, with Zimbabwe @ 49% and Japan at 28%. Can make current fiscal deficits on top of that to see how the tax hikes needed to bring to balance. E.g say Europe deficit = 40%, deficit = c.8% tax hike needed to bring to balance = 20%, US with deficit of 9% of GDP, taxes at 28% = tax hike of 33%.

Of course, spending cuts are going to be a lot more in terms of spending (but the same as the deficits in terms of GDP).


Login or register to post comments by hooligan2009
on Sun, 10/24/2010 – 05:07

I think US Debt to GDP (official Government, excluding Fraudie and Funny) will be more than 100% in around 6 months. And including Fraudie and Funny, is more like 140%.

Government Debt GDP chart here:

Government Deficit to GDP chart

and Deficit As Pct GDP&state=US&color=c&local=s

Funny owes or guarantees 3.2 trillion;jsessionid=GJGGUVL1HELOTJ2FQSHSFGI

and Fraudie owes 2.2 trillion

Now Fraudie and Funny have assets since they own c.60% of all houses in the US, but nonetheless, reporting a 97% Debt to GDP ratio is not helpful!

Of course, no-one knows what the assets are of the rest of the US Federal and State Governments since those people responsible are as useless in calculating and disclosing assets as they are at liabilities. 


Login or register to post comments by wintermute
on Sun, 10/24/2010 – 05:49

Good points.

Also GDP is constantly overstated, like unemployment is understated. So the true ratio is worse.

FDIC and AIG can be added to the Fraudie and Phoney overhang.

Login or register to post comments by BigDuke6
on Sun, 10/24/2010 – 05:41

You sort of feel sorry for the icelanders but they are the ones who brought the vengeance of the lord down upon their middle classes by hunting whales n’shit.

They are like bad gamblers who dress up in bikinis down at the local hot springs and expect you to soap their backs.

Eh? Ken what ah mean, jimmy?

Login or register to post comments by bigkahuna
on Sun, 10/24/2010 – 06:49

These guys are going through a hard time. The last thing any of us should do is make lite of their situation. You would not want them doing it to us (USA) when it happens here. People here do not know poverty. The people who have known poverty know that they never want to go back to it. It is very serious.

Login or register to post comments by snowman
on Sun, 10/24/2010 – 06:52

I find this write-up fairly ignorant, bit not disputing the main economic facts (inflation, debt etc). Iceland is in trouble, but not going down the toilet, and is such a small and highly specialized economy consisting of a population the size of a small phone book you can’t compare them to any other. I am troubled by the continued fascination of this very little country. Drawing parallels to other economies is impossible. They sell fish and are self sustainable, and have been for centuries. They dabbled in “western greed and lifestyle” and got burned by the handful of idiots who fooled them. Now back to doing what they have been for ages. Living off the land and sea. This isn’t the first time.

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