Iceland’s pension funds, which hold the bonds behind most of the country’s mortgage debt, will try to block proposals to forgive as much as $2 billion in bad loans that the government says it is considering.
A group that represents households demanding debt relief says lenders should write off up to $1.99 billion in mortgage loans to help the 39% of homeowners who are technically insolvent. The government this week said it may back the proposal as it responds to protests that drew bigger crowds than in the weeks before former Prime Minister Geir H. Haarde’s administration was ousted in January 2009.
“We don’t support … general write-offs on loans,” Hrafn Magnusson, managing director of the Icelandic Pension Funds Association, which has assets of $16.6 billion, said in an interview Thursday. “The measure would mean that members will see their pensions cut.”
Prime Minister Johanna Sigurdardottir’s assurances after the Oct. 4 protests that homeowners will get swift debt relief may leave the state more indebted and breach a clause in the island’s loan agreement with the International Monetary Fund. The government has yet to discuss the proposals with the IMF, Finance Minister Steingrimur J. Sigfusson said in an interview.
Failure to secure backing from the country’s pension funds would jeopardize any government plans to grant a general write-down of mortgage debt, Ms. Sigurdardottir said.
Iceland, which is ranked “junk” at Fitch Ratings, also risks putting its credit grade under further pressure if it agrees to measures that add to Treasury debt.