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UPDATE 1-Iceland c.bank warns on household debt

Published 10/26/2009, 01:09 PM
Updated 10/26/2009, 01:16 PM
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* Expects one-third of households to have negative equity

* Central bank plans to lift cap controls in stages

* Says still certain risk in lifting controls

(Adds background, details)

REYKJAVIK, Oct 26 (Reuters) - Iceland's central bank warned on Monday a growing number of households could slip deeper into debt as the country's financial crisis persisted, while it stuck to a plan to lift capital controls only gradually.

About one in three households will owe more money on their mortgages than their homes are worth if house prices decline as steeply as the central bank recently forecast, it said in its annual assessment of the Icelandic financial system.

That finding compares with one-fifth of homeowners in the north Atlantic nation who had negative housing equity at the end of 2008, it said.

Sedlabanki said that debt service burden climbed over the "danger limit" for as much as 26 percent of Icelandic households early this year due to the weak Icelandic crown, high inflation, and falling disposable income.

Many people in Iceland have mortgages, car loans and other debts in foreign currencies, so the national currency's collapse has made their debt burdens all the more crippling.

For 23 percent of households, the total debt service for mortgages, car loans and overdraft loans exceeded 40 percent of disposable income, commonly considered the "danger limit" for total debt service.

FX CONTROLS

Sedlabanki repeated a stance given in August that capital controls would only be lifted gradually as risks remained in the financial system.

Iceland introduced the controls a year ago to stem a massive outflow of funds following the total collapse of its banking system and currency.

"Lifting the capital controls entails a certain risk, partly because it involves liberalising capital flows while the ownership structure of the banks is still being clarified," the central bank said. (Reporting by Omar Valdimarsson; editing by Stephen Nisbet)

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