Volume 6, Special Issue, October 2016 Juridical Tribune
compatibility of inflation-indexed secured and unsecured loans (consumer credit
and/or mortgage credit) with European Economic Area (EEA) law.
Indexation of credit is a novel issue in European law although it is related
to price-variation clauses in consumer law. This indexation to real inflation ex-post
(after the signature of credit contract) is a unique practice found in Iceland but also
known in other countries of Latin America
. In the field of credit and financial
services, Iceland is an exception to the general theory of debt adopted in Europe
based on nominalism
. All EEA countries have adopted a nominalistic approach to
credit and debt. When an obligation/debt keeps its nominal value, inflation erodes
slowly the real value of debt (since it keeps its original nominated or face value
while the salaries tend to follow inflation). In a context of inflation, nominalism
and time help debtors and damages creditors. When creditors are financial
professional institutions and debtors are consumers, nominalism and inflation tend
to compensate the original imbalance of power and asymmetry of information and
education that exists between contracting parties.
In Iceland the opposite occurs since credit is constructed on the basis of
valorism theory. Inflation benefits creditors because the principal of the debt is
directly linked/indexed to the general inflation index and thus keeps its real value
or purchasing power over time. Indexation is thus a practice which operates ex-
post, a sort of semi-automatic price-variation clause embedded in the contract
which deploys its effect during the whole life of the credit and updates the
principal, the interest and other charges on a regular basis. Indexation clauses seem
to be standard terms; they are not individually negotiated (indexation of credit has
been a ―take it or leave it‖ situation for consumers). In practice, the loan agreement
is articulated through a bond (financial instrument) that the consumer issues to the
bank promising future payments and pledging guarantees. Empirical research done
by consumer associations has proved that the method of calculation of cost of
credit is never explicitly disclosed to consumers ex-ante, usually there is only a
general referral to indexation to the consumer price index (―CPI‖) in the contract.
The financial sector has traditionally argued that there this indexation is not
a choice but a necessity in Iceland due to the historic inflation
and a micro-
Ásgeir Jónsson, Sigurður Jóhannesson, Valdimar Árman, Brice Benaben and Stefania Perrucci,
“Nauðsyn eða val? Verðtrygging, vextir og verðbolga‖ (―Necessity or choice? Indexation, interest
and inflation‖), Report for the Association of Financial institutions SFF (Reykjavík, 2012) available
on internet at <http://sff.is/sites/default/files/naudsyn_eda_val-verdtrygging_vextir_og_
verdbolga.pdf> (consulted last time in July 1, 2016). See Chapter 7 ―Inflation Indexation and
Housing Finance‖, at 171- 1 96 which presents a good summary of the problem in English with a
history of indexation to indexation in Latin America for comparison purposes and final policy
suggestions for Iceland. As the report shows, Chile has a similar system of indexing loans to the
consumer price index (using a different currency called Unidad de Fomento UF).
On the different theories of debt (nominalism vs. valorism) see Mann, The leg al aspect of money
(OUP, 1938 and 1992) and Kessler, "Book Review: Money in the Law" 40 Columbia Law Review
175 (1940) available on internet at <http://digitalcommons.law.yale.edu/fss_papers/2713>
(consulted last time in July 1, 2016).
Jónsson and others, op. cit. supra note 4.