April 26, 2013 / 10:16 PM / in 4 years

Iceland government heads for defeat as center right revives

REYKJAVIK (Reuters) - Icelanders fed up with austerity are set to oust the ruling Social Democrats in elections on Saturday after being wooed with promises of tax cuts and debt relief from the center right that presided over the nation’s financial meltdown five years ago.

Chairman of Iceland's Independence Party Bjarni Benediktsson stands inside the Reykjavik Opera House in Reykjavik, April 23, 2013. REUTERS/Balazs Koranyi

With promises of a quick recovery fading, voters are angered by mounting mortgage debt, rapid inflation and crippling capital controls that keep investment at a record low.

“To me, this election is about whether my daughter will be able to keep her house or not,” said Thury Steinthorsdottir, 55, who runs a small bed and breakfast in Laugarvatn, 30 km (20 miles) east of Reykjavik.

“The crash wiped out all the equity on her house and she’s now working 70-80 hours a week with three children just to keep up with payments. This can’t go on anymore.”

With a population of 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 when credit markets froze in the wake of the Lehman Brothers bankruptcy.

Property prices followed, tumbling by more than 50 percent in some cases while real wages fell close to 30 percent and mortgages, often indexed to inflation, soared.

Polls favor Independence Party Chairman Bjarni Benediktsson to become the next prime minister after he took a last minute lead from Sigmundur Gunnlaugsson’s Progressive Party. The Social Democrats, despite making late poll gains, are expected to come in a distant third.

Neither of the leading parties is likely to win a majority, leaving the Progressives and Independence to form a coalition. The two led Iceland, often jointly, for nearly 30 years before the crash and party insiders consider a coalition a done deal.

Iceland’s 235,000 eligible voters will cast their ballots from 0900 GMT to 2200 GMT with first results expected shortly after polls close.

“This election revolves around mortgage debt,” said Egill Helgason, a political commentator for the Icelandic national broadcaster RUV. “The Progressives have promised the world, and then some.”

The promises, which focus on forcing foreign creditors of failed banks to take a write down on their claims and give the cash to households, could be the only hitch.

“The last election was about the past and responsibility for the crisis. Now we’re voting about the way ahead,” Benediktsson, 43, said.

“We’ve seen what cutbacks have done for our health care system and social benefits... and people realize that we just can’t cut down more to balance the budget,” the former professional soccer player said.

Economic growth, a respectable 2.6 percent in 2011, slowed to 1.8 percent last year and some forecast a further slowdown this year as lack of investment weighs on output.

Editing by Michael Roddy

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