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Wednesday 17 September 2014

Icelandic voters ready to oust austerity government in weekend election

Balazs Koranyi and Robert Robertson

Published 25/04/2013 | 15:27

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Iceland's Progressive Party chairman Sigmundur Gunnlaugsson stands in front of the Althing, the country's parliament in Reykjavik
Iceland's Progressive Party chairman Sigmundur Gunnlaugsson stands in front of the Althing, the country's parliament in Reykjavik

FED up with hard times, Icelanders are ready to dump the ruling Social Democrats in an election on Saturday and bring back the centre-right parties that presided over a spectacular economic rise and fall.

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The days when the people of the windswept Atlantic island enjoyed cheap credit, luxury cars and steadily rising house prices have disappeared.

Five years on from the bust, the middle class is saddled with debts and old cars. About 40 percent of the people struggle to make ends meet and 10 percent are behind on their mortgages.

Polls show the voters will reject the Social Democrats and their international bailout terms, and overwhelmingly back the Progressive and Independence parties.

"Five years ago they said 'Oh, it'll be over soon' and they're still saying that, but my mortgage doesn't seem to be shrinking," said Pall Jonsson, 52, a shipyard worker.

When the economy collapsed, his inflation-indexed mortgage soared, erasing any equity on his home and forcing him to take on a second job, he said.

"I'm stuck with two jobs and about 280 hours of work a month, doing bar tending in the evenings," he said as he repaired a tourist vessel at the yard.

The main question is whether Sigmundur Gunnlaugsonn, the 38-year-old head of the Progressive Party, or Independence Party leader Bjarni Benediktsson, 43, will lead the next government.

The parties promise to lower taxes, boost debt relief for households and to end capital controls that have stifled investment.

Critics say they risk creating unrealistic expectations of a faster recovery.

"There is tremendous anger in the middle class because it's become clear that the good times are never coming back," said Asgeir Jonsson, an adviser to investment fund Gamma.

But he campaign has been barely visible in windswept Iceland. Campaign meetings, primarily conducted at work places, often attracted no more than a few dozen people.

FISHING TO FINANCE

The nation of 320,000, which had traditionally relied on the fishing industry, emerged as a financial centre after its liberalized banks borrowed heavily on Europe's cheap credit markets and attracted billions of euros worth of saving from countries such as Britain and the Netherlands.

When the credit bubble burst in 2008, Iceland's three banks, having amassed assets worth $180 billion or more than 10 times the country's annual output, fell in a matter of days. Property prices collapsed and the boom was over virtually overnight.

It was a harbinger of things to come in Europe.

Economists say the bailout was a relative success. Currency controls stabilised the crown and saved the domestic part of the banking system even as foreign creditors were hit. Debt relief helped households and growth returned despite a tight budget.

"They were the best disciples the IMF ever had, the IMF has showered them with praise," said Egill Helgason, a political commentator for the Icelandic national broadcaster RUV said.

"But the voters didn't want the IMF as their government."

The government was undermined by a failed attempt to rewrite the constitution, unpopular changes in fishing taxation, and a perceived leniency towards paying back the failed bank's foreign creditors.

Growth, a decent 2.6 percent in 2011, slowed to 1.8 percent last year.

"This election is about debt and relieving households," said the Progressive Party's Gunnlaugsson, who is favourite to become the next prime minister. "We are facing the risk of getting crushed by a heap of debt.

Gunnlaugsson came to parliament after the crash, helping him to maintain an image of clean hands. Recent polls, which put the Progressive Party slightly ahead, indicate it and Independence will be forced to team up.

"Ultimately we're prepared to be in a coalition, Iceland needs a stable government," said Benediktsson, a former professional soccer player and an avid trout fisher.

"All of our policies are about growth, growing into the future through lower taxes. People realize that we cannot cut down to balance the budget, we need growth."

The main hurdle to a stable government could be the Progressive Party's generous promises to write down debt held by foreigners and use the money to cut household debt.

Independence accepted the promise of writing off much of the 2.5 trillion crowns ($21.4 billion) worth of assets held in the estate of failed banks as a necessary move.

The Social Democrats call this voodoo economics that will sacrifice hard-earned budget discipline and lead to inflation, which would hurt households with indexed mortgages.

The election will also be a rejection of EU membership after Icelanders felt mistreated in a dispute over a repaying British and Dutch savers following the banking collapse.

"Once growth returned, support for EU membership evaporated and few in the EU think Iceland is serious about joining," Danske Bank economic Lars Christensen said.

Reuters

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