Icelanders oust government over austerity programme

Fatigued by years of austerity and swayed by promises of debt relief, Icelandic voters dumped the Social Democrats from power yesterday, returning a centre-right government that ruled over its stunning financial collapse just five years ago.

Once a European financial hub, this windswept north Atlantic island of glaciers, geysers and volcanoes has been limping along for years, still crippled from a crash that brought it to its knees in just a matter of days.

“We are offering a different road, a road to growth, protecting social security, better welfare and job creation,” Independence Party leader Bjarni Benediktsson, the favourite to become the next prime minister after his party took first place in the vote, told Reuters as the results were coming in.

“What we won’t compromise about is cutting taxes and lifting the living standards of people,” said Mr Benediktsson (43), a former professional soccer player.

The victory caps a remarkable comeback for him.

Just two weeks ago he considered resigning after record low poll ratings prompted calls for him to hand over his party’s leadership to his deputy.

Hailing from a wealthy family with extensive business interests, Mr Benediktsson, an avid trout and salmon fisher, was considered out of touch and tainted by the financial collapse.

Instead of stepping aside, he fought back with a rare personal television interview, giving voters a glimpse of his human side and propping up his party’s ratings.

His Independence party took 26.5 per cent of the vote, giving it 19 seats in the 63-seat parliament. The Progressive Party collected 22 per cent, winning 18 seats, while the ruling Social Democrats got 13.5 per cent and 9 seats, according to results with over two-thirds of the vote counted.

Mr Benediktsson’s first task will be to form a coalition, although a tie-up with Sigmundur Gunnlaugsson’s Progressive Party, an ally in several governments over the past three decades, is a widely expected outcome.

In a country where Nordic civility prevails, the president walks without security and members of parliament are listed in the phone book, coalitions are usually formed in just days.

“Historically two-party coalitions are the strongest and ... if you look at the (results board) the choice seems to be clear,” ,Mr Benediktsson said. “We’ll go into coalition with whoever we can govern with.”

The Independence Party has been part of every government between 1980 and 2009, presiding over the privatisation of the banks, the financial sector’s liberalisation and its eventual demise.

Campaigning on a platform of tax cuts, it promised relief to households whose inflation-indexed mortgages have kept growing, despite several write-offs since the crash.

It also argued that foreign creditors of its failed banks, now locked into the country because of capital controls, will have to accept a massive write-off, perhaps as much as 75 percent, before they would be let out.

The write-off and the refinancing of other corporate debt, for example to Landsbanki and Reykjavik Energy, could let Iceland ease capital controls within 12 to 18 months, Benediktsson predicted.

Still, Mr Gunnlaugsson was not yet ready to concede the premiership: “Sometimes the biggest party delegates the prime minister, sometimes not. We’ve seen all sort of governments.”

The vote was also a de facto rejection of EU membership as staunchly independent-minded voters rejected the Social Democrats’ argument that joining the block was the only way for long-term security.

With a population of just 320,000, Iceland became a European financial centre 10 years ago when its liberalised banks borrowed heavily on ultra cheap overseas markets and lured British and Dutch savers with high returns.

Amassing assets worth more than ten times Iceland’s GDP, Landsbanki, Kaupthing and Glitnir collapsed in quick succession, dragging the entire country into a financial abyss in October 2008.

Reuters