Dissatisfied Icelanders question myth of post-crash success

  • conservativej...

    Posts: 2478

    Apr 27, 2013 2:15 PM GMT
    Viewed from abroad, Iceland is one of the success stories of the financial crisis. It allowed its banks to fail, let its currency rather than the unemployment rate take the strain, and returned to economic growth – inspiring devoted followers from Ireland to Portugal as well as luminaries such as Paul Krugman, Joseph Stiglitz and the International Monetary Fund.

    The only problem is: no one told ordinary Icelanders.

    Iceland goes to the polls on Saturday and is all but certain to kick out the current leftwing government and replace it with the centre-right opposition that led the country during its extraordinary boom and bust period earlier this century. The Progressive and Independence parties are together polling about 50 per cent, compared with just 25 per cent for the current government coalition.

    The reason is clear: Icelanders are still dissatisfied with their lot, with many yearning for a return to the days before they became one of the earliest and biggest victims of the financial crisis.

    “The rosy picture that is painted of Iceland isn’t right; we have economic difficulties that have arisen from the fall in the currency.” The man saying this is not some opposition reactionary but Arni Pall Arnason, the head of the main government party, the Social Democrats.

    It is maybe because he has not been a government minister recently that Mr Arnason is one of the most eloquent Icelandic politicians on why his party is likely to see its vote fall by half.

    “There is disillusionment here as everywhere else in Europe. It revolves around that we had a 50 per cent drop in the currency, meaning purchasing power has gone down 30-40 per cent,” he says.

    Economic growth of 2.9 per cent in 2011 and 1.6 per cent in 2012 would be viewed as good almost anywhere else in Europe but it is dismissed by Mr Arnason as “pretty lacklustre”. He openly speculates that Ireland, often compared unfavourably to Iceland due to its support for its stricken banks, will come out of the crisis in better shape, saying “the jury is still out” on that.

    What is striking is how many of the things praised abroad are the same things leading to discontent at home.

    One factor is what Bjarni Benediktsson, the head of the pro-business Independence party and one of two contenders for the post of prime minister, calls the “dark side of the krona”. He wants to keep the krona – unlike Mr Arnason who is keen to adopt the euro – but concedes that its sharp fall has hurt many households.

    This is because a majority of Icelandic mortgages are linked to inflation. And as the krona fell after the crisis so inflation has risen as the cost of imported goods has gone up.

    That has meant that the issues of indexed mortgages and debt relief are at the top of the campaign. Sigmundur David Gunnlaugsson, leader of the centrist Progressive party and the other prime ministerial candidate, has made the leitmotiv of his campaign a pledge to write down up to 20 per cent of mortgage debt through money received from the foreign creditors of the collapsed banks.

    Many of the other parties allege hypocrisy as Progressive and Independence were in power from 1995-2007 when banks were deregulated and Iceland underwent a huge credit-fuelled boom. “It is the problem of the leftwing: they clean up the vomit after the cocaine party of the neocons, who go into rehab and then come back to reap the benefits,” says Birgitta Jonsdottir, head of the Pirate party.

    Mr Arnason says the two opposition parties have gone back to “promising boom and bust”. But Mr Gunnlaugsson calls the idea that his party contributed to the crash when last in government “utter balderdash”.

    Still, the focus on debt relief has concerned some in the financial sector, especially after the current government adopted a measure much praised abroad of writing down all mortgage debt above 110 per cent of the value of the property. The head of one Icelandic bank says: “I’m quite worried about it. We notice it among our customers who say: ‘we don’t want to pay off more of our mortgages because they will be written off’. People are just voting for themselves.”

    Then there is the question of growth. With much of Europe mired in recession or stagnant growth, Iceland has been envied for its above-average rises in gross domestic product. But many in business complain it has not been nearly enough to lift the country out of its funk.

    Arni Oddur Thordarson, chairman of Marel, a maker of food processing machines that is one of Iceland’s biggest companies, says the most important task for the next government is to restore Iceland to decent growth. “We have to increase investments and attract foreign investors,” he says.


    UPDATE 2-Iceland centre-right opposition takes big early election lead

    * Two centre right parties hold commanding lead

    * Independence Party ahead in early results

    * Voters promised debt relief, end of austerity

    By Balazs Koranyi and Robert Robertson

    REYKJAVIK, April 27 (Reuters) - Iceland's centre-right parties took a commanding early lead in elections on Saturday, staying on course to return to power with promises of tax cuts and debt relief just five years after presiding over the country's spectacular economic collapse.

    The Independence and Progressive Parties, which ruled the nation, often in coalition, for nearly 30 years before the 2008 collapse, had collected close to half the votes counted so far, putting them solidly ahead of the ruling Social Democrats and on track to form Iceland's next government.

    "People seem to have a very short memory," Halldor Gudmundsson, 44, said after casting his ballot. "These are the parties that got us into the mess in the first place."

    With nearly 20 percent of overall votes counted, the Independence Party, which was part of every government between 1980 and 2009, led with 24.9 percent, and the Progressive Party was close behind with 22.7 percent, while the Social Democrats were a distant third with 13.9 percent.

    "We've seen what cutbacks have done for our healthcare system and social benefits ... now it's time to make new investments, create jobs and start growth," said Independence Party leader Bjarni Benediktsson, the favourite to become Iceland's next prime minister.

    With a population of just 320,000, Iceland became a European financial hub 10 years ago when its banks borrowed money cheaply and lured British and Dutch savers with high returns.

    Growing unchecked under a relaxed regulatory regime, the banks expanded to 10 times Iceland's GDP by 2008, then crashed in a matter of days, leaving behind a long trail of debt and bankruptcy and foreshadowing the trouble many other European nations would face.

    The Social Democrats stabilised the economy with a package hailed as exemplary by the International Monetary Fund, but a series of policy blunders, tax hikes, leniency towards foreign creditors and inability to deal with soaring household debt cost them their popularity.

    "This government has done very little to get things going and have moved us backwards in many ways, so it's about time it steps down," Reykjavik voter Gudrun Gunnarsdottir, 36, said.

    "I think we will see more investment and lower taxes, which is what people, families and also companies in this country need," she said after voting.

    Both the Progressives and Independence centred their campaign on household debt relief, arguing that households, which suffered a 20 percent fall in both real wages and property prices in 2009, could no longer shoulder the cost of recovery.

  • roadbikeRob

    Posts: 18411

    Apr 27, 2013 2:32 PM GMT
    As for gross domestic product, Iceland is particularly vulnerable due to its no choice situation of being almost totally reliant on both fishing and dairy products. Despite the fact that it is a mountainous, volcanic island, Iceland is seriously lacking in many natural and mineral resources which is highly unusual for a volcanic land. It does contain a tremendous wealth of hydropower and geothermal power. Only a small percentage of the country's land is arable and the cool, moist climate restricts agriculture to primarily dairy farming. The other larger major source of income is the surrounding sea. Otherwise, Iceland must import most of its food, clothing, and electric/technology goods. That is the reason why it is so expensive to live in Iceland.
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    Apr 27, 2013 6:17 PM GMT
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