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Iceland’s Progressives Start Talks With Independence Party

Iceland’s Progressive Party will start talks on forming a government with the Independence Party, seeking a coalition that will ease households’ debt burdens and impose writedowns on creditors in the nation’s failed banks.

After earlier this week receiving a mandate from President Olafur R. Grimsson, the Progressive Party will “begin formal government formation discussions” with the Independence Party, Chairman Sigmundur David Gunnlaugsson said in an e-mailed statement. The Progressives jumped 9.6 percentage points to 24.4 percent in the April 27 elections, second behind the Independence Party, which won 26.7 percent.

“My estimation of the preparatory discussions between myself and the chairman of the Independence Party is that there’s a good will on his behalf to work on implementing actions because of the debt problems, with results for households in the forefront,” Gunnlaugsson said.

The opposition parties attracted voters burdened by inflation-linked mortgages with promises of debt-forgiveness of as much as 20 percent as well as tax cuts. Icelanders owe domestic banks about 1.43 trillion kronur ($12.3 billion) and have struggled to keep up with debt payments as consumer price increases have averaged more than 7 percent over the past four years. They eased to 3.3 percent last month after interest rate increases from the central bank and as the krona strengthened.

Accepting Writedowns

The island’s economy collapsed in 2008 after its three- largest banks failed, defaulting on $85 billion in debt. Following the failure, the country received a $4.6 billion bailout from the International Monetary Fund, a program it emerged from in August 2011.

The Progressives have pledged to cut mortgage debt by using proceeds from writedowns on 450 billion kronur of domestic- currency assets held by the creditors in the failed banks.

“The creditors of the estates of the failed banks will have to accept writedowns of their claims,” Gunnlaugsson said, also pledging that the state won’t bear the burden of his election promises. “It’s not the aim that the resurrection of the homes will cost the Treasury damages that it can’t afford.”

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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