RUV (the Icelandic equivalent of BBC) interviewed me Wednesday on the cul-de-sac that the Housing Financing Fund is stuck in.
Some of the points I raised:
- HFF has a government guarantee (some concerns have been raised if it is truly bound into law) and therefore, a non-payment of its debt can be considered a default of the Icelandic State
- since the net interest differential has become negative due to mortgage repayments and the Fund's inability to repay its own debts at its own will (the HFF bonds are irredeemable), the Fund has practically become a leech on the State's finances: every 2-3 years, the government has to pump new equity into the fund
- this need to pump new equity into the Fund impairs the prospects of abolishing the capital controls in Iceland as the Central Bank is of the opinion that the public finances must be balanced before capital controls are lifted
- but due to the capital controls, the interest rates in the Icelandic economy as pushed downwards. This gives households the incentive to refinance their mortgages, which they have begun to do (especially with non-indexed loans from the banks)
- this again creates the "leeching" situation of the Housing Financing Fund due to the fact that its bonds are irredeemable. Ergo: we have a potential vicious cycle
- if a non-payment of HFF debt is considered to be a government default, we cannot do much about the bonds which have issued so far. We can however stop issuing more of them! The Chairman of the Housing Financing Fund was asked later the same day about this proposal of mine and he said that although it had not been made official, the HFF's board had already decided to stop issuing more HFF irredeemable bonds. That comment was later watered down by a statement from the HFF board itself.
- the debt rating of the Icelandic State is hampered by the fact that the State guarantee amounts to 950 billion ISK (roughly double the gross tax income of the Icelandic federal government).
- increasing interest rates will not solve the problem of the negative interest rate differential since if interest rates are raised, borrowers will simply default instead, leading to equity problems all the same
The interview can be found here (in Icelandic)
"The Mirror" on Rás 2