Iceland’s likely future PM says country’s bank debt write down is inevitable

iceland flag littleThe man predicted to become Iceland’s next prime minister said a major debt write down is necessary prior to lifting crippling currency controls. Iceland’s next parliamentary election is scheduled for 27 April.

Progressive Party chairman Sigmundur Gunnlaugsson said in a Reuters interview that his country is not recovering as strongly from its recent economic collapse as the current government proclaims. The Progressive Party (Framsóknarflokkurinn), one of two centre right parties predicted to form Iceland’s next coalition government, is presently leading in opinion polls.

Once the new government is formed, both parties plan to work out a deal with the creditors who bought up the assets from the Icelandic banks which collapsed in 2008. Sigmundur said to Reuters that Iceland could not begin lifting the controls prohibiting foreign creditors from taking money out of the country until hedge funds and other creditors agree to write off the majority of the debt.

During an interview at Iceland’s parliament, the Althing, Sigmundur said, “Hedge funds bought into this situation and knew very well they would have to negotiate their way out; they bought into capital controls.” Gunnlaugsson added, “It’s also been clear that such negotiations will have to end with some of this (debt) being left behind so they could take the rest and let us lift capital controls.”

Few nations have experienced as many economic highs or lows in recent years as Iceland, whose three banks expanded up to 10 times the nation’s GDP before their massive 2008 collapse. Capital controls, an IMF bailout and debt write off all helped Iceland quickly recover.

“Sure, on paper it always looked good but the reality is very different,” Independence Party (Sjálfstæðisflokkurinn) chairman Bjarni Benediktsson said during a Reuters interview. The Independence Party is expected to form Iceland’s next coalition government with Sigmundur’s Progressive Party. Bjarni added, “The rebound has been much weaker than the government claims and people felt very little of it.”

Iceland’s current coalition government has suffered in the polls since Iceland’s growth slowed down during the past few years. The Independence and Progressive parties governed Iceland, either together or on their own, for nearly 30 years prior to the collapse. However, the two parties differ on how they would handle any funds gained after a debt write off.

The Independence Party is leaning towards household tax relief, while the Progressive Party prefers using funds to abolish indexation and relieve households. The Progressive Party is slightly ahead of the Independence Party in the most recent polls, with the ruling Social Democrats ranking a distant third.

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