While Icelanders have a long history of sagas, they’re quick to forgive.
Polls show voters are set to back the same parties that helped Iceland’s banks dominate the economy before their 2008 collapse triggered the worst recession in six decades. Support for the Progressive and Independence parties was 29.5 percent and 24.6 percent, respectively, according to the average of four polls released last week. Icelanders vote on April 27.
While the government of Social Democratic Prime Minister Johanna Sigurdardottir, which took over in 2009, has won praise from the International Monetary Fund and debt rating companies for its handling of the crisis, voters are still struggling to make mortgage payments. In response candidates are outbidding each other with promises of debt writedowns and tax cuts, measures they say will be paid for by bank creditors.
“Like Bill Clinton sarcastically said: ‘It’s the economy, stupid,’” Jon Gunnar Axelsson, a deputy principal at Fellaskoli in Fljotsdalsherad in east Iceland, said in an interview. He plans to cast a blank ballot. “People vote with their wallets. After the catastrophe Iceland has been going through, everything will still be a mess in four years’ time.”
The Social Democratic Alliance and Left Green Party coalition stands to lose by a landslide, garnering a combined support of 21 percent, the polls last week showed.
Sigurdardottir took over from the Independence Party-led government of former Prime Minister Geir H. Haarde, which was ousted amid a wave of street protests after the country’s three- largest banks defaulted on $85 billion. While the economy is once again expanding, it still faces a number of hurdles.
Since 2008, Iceland has relied on capital controls now blocking as much as $8 billion in offshore kronur holdings from being offloaded. The government and central bank have yet to design a roadmap for exiting the controls as they try to avoid a new currency crisis. The turmoil in 2008 sent the krona plunging as much as 80 percent against the euro in the offshore market. Even the official onshore rate dropped close to 50 percent.
The inflation caused by krona losses to date has crippled households. With more than 80 percent of private debt linked to consumer prices, Icelanders are more vulnerable to currency swings than borrowers elsewhere. Households owe domestic lenders about 1.43 trillion kronur ($11.3 billion) in loans indexed to inflation. They’ve struggled to keep up debt payments as price gains hover close to 4 percent.
Unemployment, though lower than at the height of the turmoil, is still about five times pre-crisis levels. The jobless rate was 5.3 percent in March.
“It’s tempting in the environment we’re in, where there are a lot of people that have it bad and owe a great deal and are facing difficulties, to give them grand promises,” Gunnar Helgi Kristinsson, a professor in political science at the University of Iceland, said in a telephone interview. “Especially when someone else has started the bidding.”
The island emerged from an IMF-backed rescue program in 2011 and has since returned to international capital markets with two U.S. dollar bond sales. In January, it won a court battle against the U.K. and the Netherlands, freeing it from as much as $2.6 billion in damages for not honoring depositor claims stemming from failed Landsbanki Islands hf.
The Progressive Party, one of the pre-crisis architects of Iceland’s financial deregulation, is now leading the way in pledging bigger writedowns on bank creditor debt to help protect household savings. The party says it will use the 450 billion kronur of domestic-currency assets held by creditors in Iceland’s failed banks to reduce consumer mortgages.
Lars Christensen, Danske Bank A/S (DANSKE)’s chief emerging markets economist and one of the first to predict Iceland’s 2008 meltdown, said in an interview last week that plans to hurt investors will probably backfire on the fragile economy.
While there’s a need to ease household debt, “paying for that by seizing the assets of foreign investors such as the creditors of the failed banks isn’t the way to do it. Some of those assets belong to friendly investors who wanted to invest in the Icelandic economy, such as Scandinavian pension funds. If their assets are seized, the international investor community won’t soon forget that.”
Sigmundur David Gunnlaugsson, the leader of the Progressives, said in an interview last month that Iceland’s foreign exchange balance is a matter of “huge concern” that he’ll address if elected. He says he’ll enact measures that will help Iceland shed its image as an emerging market economy.
Bjorn Steinbekk, a Reykjavik-based businessman, said the current coalition has failed to deliver on its promises to households.
“I don’t think the Progressive Party can live up to all its promises, and their history is tainted with protecting interests and plotting behind the scenes -- as is the case with so many others,” he said. “However, four years is a long time and the yield from those four years is far from acceptable.”
The Independence Party once ruled by Haarde, who has since been tried for economic mismanagement, has also vowed to alleviate households’ financial pain. In February, the party said it will prioritize cutting households’ reliance on loans linked to consumer prices. The party also wants to cut taxes to stimulate growth.
“What’s missing more than anything in Iceland today is growth and vigor in the economy,” party Chairman Bjarni Benediktsson said in a March 12 interview. “To get that growth going, we need to eliminate the uncertainty that has been clouding our fundamental economic sectors, and also better the operational conditions of these companies with tax changes. We want to simplify again the tax system and lower taxes.”
Iceland is now outgrowing most of Europe. The economy expanded 1.6 percent last year and will grow 1.9 percent this year, the IMF estimates. The euro area will shrink 0.3 percent this year, according to the Washington-based fund.
The Social Democrats over the weekend warned over the perils of an opposition victory, saying it will probably halt talks on joining the European Union. The country has put on hold talks that started in 2010 on EU accession. Polls show EU membership is opposed by a majority of Icelanders.
“Bjarni and Sigmundur are like lovebirds in courtship these days and seem bent on reviving the cooperation of the Independence Party and Progressive Party,” Social Democratic Alliance Chairman Arni P. Arnason wrote in an online chat in newspaper DV yesterday. “We need power to have an impact on government formation.”
The economic turmoil has spurred new parties seeking to tap voter dissatisfaction, including the Pirate Party and a group called A Bright Future, which favors entering the European Union. The two parties are backed by about 7.3 percent and 7.9 percent of voters, on average, according to the polls last week. A party needs 5 percent to get seats in parliament.
The new political movements appeal to voters disappointed by both the current and former governments. Helgi Sigurvin Steindal, a librarian at the Akranes Public Library, said the Independence Party and the Progressives left “a pile of mess” the last time they were in power.
“I still wouldn’t vote for the Left Green Party or the Social Democratic Alliance,” said Steindal. “If it weren’t for the Pirates, I would probably vote for A Bright Future.”
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