New Bubbles In Iceland’s Hot Springs

Photographer: Arnaldur Halldorsson/Bloomberg

Reykjavik, Iceland

Where Iceland goes, the world follows. Well, not really. But if any country can claim to be place where the financial crisis moved most swiftly, Iceland (pop. 320,000) is it. So it’s worth watching when hints of another crisis boil up there.

Bloomberg’s Omar Valdimarsson reports from Iceland about that country’s vigorous mortgage relief movement. Icelandic banks are again in trouble, writes Valdimarsson, and its public mortgage authority is facing default amid a lawsuit over mortgages on which interest is tied to inflation. Homeowners claim that such mortgages are unfair and illegal.

Iceland’s inflation rate hit 18.1 percent in 2008, so you can see why homeowners are complaining. That said, inflation since 2010 has run at four or five percent, in-line with pre-crisis levels. One cycle of debt relief seems to have left borrowers primed to come back for more.

The most startling part here: The plea for relief comes in the middle of a major property boom. Last year, Valdimarsson wrote this story about Iceland’s emerging property bubble, fed by capital locked in the country by currency controls. Offshore money trapped in Iceland flows into real estate. It also goes into housing bonds, used to finance mortgages, driving up prices … and enticing more folks to buy.

At the moment, Iceland’s mortgage market is exploding. Even as the national Housing Finance Fund, the biggest mortgage lender and target of the recent protests, staggers under lawsuits and defaults, Iceland’s revived private banks are stepping into the breach.*

The  crash that took down the small country’s entire banking system doesn’t seem to have made Icelanders more cautious. On the contrary there may be a daredevil effect here: Getting through one economic near-death experience might make folks more reckless about getting into others.



* For the really hard-core data types, you can see the growth in lending in this report from Iceland’s central bank, in table VI-8.

An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe. In response to that version, one reader wrote, “Don’t you ever forget that the crisis started in the US of A!” TMN will stipulate to that. There’s no intent here to blame little Iceland for taking down the world financial system.

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