Press release: The Supreme Court of Iceland has today pronounced its verdict in Case No. 471/2010, that interest should be calculated on unlawfully foreign-denominated automobile loans in accordance with the interest rates published by the Central Bank of Iceland. The Government is determined to ensure fairness, resolve issues and improve the situation of debtors. In view of this outcome, the Ministry of Economic Affairs will introduce legislation aimed at ensuring a fair resolution for borrowers and taxpayers. The Government has worked on preparing this legislation, with assistance from domestic and foreign consultants, which in addition has been based on data from the Financial Supervisory Authority and the Central Bank of Iceland.
In the interests of fairness, the legislation will ensure that the Supreme Court’s conclusion will apply to all automobile loans and real estate mortgages which are linked to the exchange rates of foreign currencies. The legislation will apply to those classes of loans which are considered to be based on unlawful exchange-rate linking. According to calculations by experts of the Central Bank of Iceland, the outstanding principal on these loans will decrease substantially as a result of the change, e.g. by 25% to 47% for loans with a 25-year term.
Foreign-denominated housing mortgages will be converted to inflation-linked interest rates, reducing the outstanding principal on these mortgages. Borrowers will, furthermore, be offered the option of converting their loans to lawful foreign-denominated loans or to convert them to non-indexed loans bearing Icelandic interest rates. These benefits can be achieved without resulting in a financial blow to credit institutions which would threaten the stability of the financial system.
In the interests of fairness, it is also considered important to clarify the legality of foreign-denominated corporate loans. The total amount of such loans is estimated at around ISK 841 billion, while loans to households total some ISK 186 billion. A major portion of the corporate loans have been taken out by parties with foreign currency income. There are strong arguments for granting greater consumer protection to individuals than to corporates. In addition, major public interests are at stake in ensuring that costs arising from corporate credit are not borne by taxpayers. In tandem with these actions, greater demands will be made of the banks for more rapid restructuring of corporate debt.
Furthermore, more transparent settlements will be encouraged and resolving of disputes facilitated.
September 16, 2010, Ministry of Economic Affairs