Iceland has announced plans to write down mortgages linked to inflation by 150 billion kronur ($1.25 billion) to speed the nation’s recovery after economic collapse in 2008.

The government plans to provide homeowners with as much as 70 billion kronur in direct writedowns of home-loan debt and give 80 billion kronur of tax exemptions over three years, according to a statement handed out in Reykjavik today. The deal is equivalent to 9 percent of Iceland’s $14 billion economy.

Iceland’s Financial Services Association estimates the nation’s banks have forgiven about $2 billion in debt since 2008. At 14 percent of gross domestic product, that’s the highest in the world. Prime Minister Sigmundur David Gunnlaugsson won April elections on promises to provide even more relief to households.

Iceland’s government intends to finance the writedowns by raising taxes on financial institutions, a move Finance Minister Bjarni Benediktsson said today would bring 37.5 billion kronur into Treasury coffers next year. The tax will also be levied on Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf, all of which are undergoing winding-up proceedings.