Icelanders pay high price for foreign currency loans

Karl Karlsson, a Reykjavik taxi driver, has canceled his winter vacation. The money he saved is being eaten up by his car loan payment, which has jumped more than 20 percent since June.

Like thousands of Icelanders, Karlsson borrowed in foreign currencies to get a cheaper loan as the benchmark domestic interest rate soared to 15.5 percent this year. With trading in the krona virtually suspended after it plunged against the euro, dollar and yen, debtors now face skyrocketing bills.

"I was told it was better and cheaper to take a loan in foreign currencies than in Icelandic kronur," said Karlsson, 65, who now pays 74,000 kronur a month (about $770) on his loan, compared with 59,000 four months ago. So-called currency basket loans, whose exchange rates are usually adjusted every three months, accounted for 14 percent of household debt in Iceland at the end of June, or 244 billion kronur, according to a Sept 26 note from the research department of Glitnir Bank hf. Last year the figure was 7 percent."If the krona goes down, the principal will go up," said Frosti Olafsson, an economist at the Iceland Chamber of Commerce, who added that half of his car loan was in foreign currencies. His monthly payments jumped 30 percent in the past year.