Investors Who Poured Into Iceland Now Face ‘Messy’ Election

  • Icelandic krona has rallied 12% this year as controls ease
  • Election campaign enters final stretch ahead of Saturday vote

Nielsen: Often Takes Crisis to Get Big Policy Reaction

Investors drawn to Iceland’s high yields following the partial dismantling of capital controls are facing parliamentary elections that could produce a toxic mix of political turmoil and radicalism.

Klaus Spoeri, a fund manager at Frankfurt-Trust, says that while he recently bought more Icelandic bonds because of their attractive yields of more than 5 percent, he’s now holding off.

"We’re quite confident about Iceland and the turnaround," Spoeri said. But if Saturday’s elections should "go wrong, we’ll liquidate the position."

Despite an impressive turnaround in the economy, latest surveys suggest the ruling conservative coalition of the Independence and Progressive parties stands little chance of surviving the election.

An untested alliance of opposition parties has set its sights on the leverages of power. The alliance is spearheaded by the Pirate Party, a direct-democracy movement that’s been leading the polls by riding a global wave of resentment toward the establishment.

Alliance Talks

In the run-up to election day, the Pirates have met with other opposition leaders to explore the possibility of forming a government as soon as all votes have been counted. Latest polls say the Pirate Party, the Left Green Movement, the Social Democratic Alliance and A Bright Future could together muster a comfortable enough majority to push for constitutional change and higher taxes.

According to Lars Christensen, an economist with the Copenhagen-based consultancy Market and Money Advisory who predicted Iceland’s dramatic 2008 crash, such a heterogeneous alliance risks producing a fragile and undecipherable administration. 

"If we get a four party coalition, it will be four quite different parties and a lot of inexperienced policy makers," Christensen said in an interview.

Although three of the parties are broadly left-wing, there’s still plenty of question marks about the Pirates, who defy traditional categorizations by arguing that policy should be set by grassroots members via online votes.

"They seem to be all over the political spectrum, at least in terms of economics," Christensen said of the party that was founded three years ago.

Voters’ Anger

During its time in office, the government oversaw massive improvements in the economy, turning a state deficit of 14.3 billion kronur ($125 million) into a projected surplus of 408 billion kronur and spurring the economy into growth rates rarely seen elsewhere in Europe.

And despite a legal battle with U.S. funds, foreign investors have started flocking to the island again amid a progressive lifting of the capital controls that were introduced after the country’s three largest banks collapsed in 2008 under the weight of record debt.

At the same time, the government has been hit by scandal and street protests. The snap election was called after former premier Sigmundur David Gunnlaugsson, who at the time also chaired the Progressive Party, was forced to resign following revelations in the Panama Papers that he and his wife held investments in offshore accounts.

The krona is now trading at the highest level against the euro since the 2008 crisis. Still, investors’ anxiety is reflected in the yield spread on the country’s 2.5 percent 2020 euro note, which has widened four basis points over the past week, reaching 100 basis points above the benchmark German debt.

Should they be concerned?

"The elections will represent a landmark in terms of the political setup," Christensen said, but the economy is strong enough to withstand a radical change of government.

"There’s no doubt it will be messy, but it will be Nordic messy, not Venezuela messy," he said.

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