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

Sat Apr 27, 2013 7:16pm EDT

* 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.

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