Icelandic Financial Market Digest 18. september

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

Minority partner ends Iceland‘s centre right govt. coalition

The centre-right government coalition in Iceland has collapsed in its present form, 9 months after its formation. On Thursday one of the minority coalition partners, Bright Future, voted to leave the coalition due to breach of trust. As BF has 4 members in the 63-man parliament, this means that the 1-man majority of the government in parliament (32/31) dwindles to a 28/35 minority. The govt. coalition has been battling declining popularity and growing differences between the coalition partners in how to tackle controversial subjects such as the treatment of refugees and welfare issues. 

The breach of trust issue is due to the government‘s handling of a number of cases involving the civil rights restoration of individuals previously convicted of the abuse of minors, so-called „restoration of honour“ process. In particular, prime minister and Independence party leader Bjarni Benediktsson withheld information that his father had written a letter of recommendation in such a case from his coalition partners. Benediktsson claims he was legally obliged to do so, while the other coalition parties disagree.

A new general election will probably be held on 28 October. Meanwhile, the former coalition govt. will serve as an interim government, primarily focusing on day-to-day governing tasks and implementing previously approved matters.

At this point, the fate of the just-presented 2018 Budget proposal remains completely unclear. The budget, which is supposed to result in a ISK 44bn fiscal surplus next year, is broadly in line with stable economic policy and the recent emphasis on paying down govt. debt. It has, however, been critisised by the opposition for not allowing for enough increases in govt. spending on infrastructure and health care.

Market reaction

Icelandic financial markets reacted negatively to the news on Friday The stock market fell 2.9% on Friday and the yield on Treasuries rose by 15-48 bp‘s. The ISK fell 1.5% against the EUR and 1.2% against the USD on Friday. Market participants cite both general political uncertainty and the possibility of less market- friendly government going forward as factors in the market declines. This morning, the market has been relatively calm so far as some clarity on the next steps in the political arena has appeared to ease market jitters.

It should also kept in mind that the last govt. coalition served as an interim govt. following its defeat in the elections on 29 October 2016 until the formation of the present government in January 2017 with little if any impact on the operations of the public sector or general stability in the economy.  



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