Iceland's New Chiefs Prepare to Tap Bank Cash for Spending Push

(Bloomberg) -- Iceland's new left-right coalition government is gearing up for a spending drive to fix the nation's dilapidated infrastructure after years of austerity and it could tap its banks for the some of needed cash. 

Iceland got a new government on Thursday, in a coalition between the Left Greens, the Progressive Party and the conservative Independence Party. The parties have pledged to spend more on roads and other infrastructure to catch up on an estimated 400 billion kronur ($3.9 billion) in missing investments.

According to Finance Minister Bjarni Benediktsson the government has an ace in the hole that can help finance the spending: the excess equity in its three largest banks, Arion Bank hf, Landsbankinn hf and Islandsbanki hf. The banks have leverage ratios in the 16 percent to 18 percent range at the end of June, far above the 3 percent minimum, according to Iceland's central bank.

“We have hundreds of billions of kronur, way more than any other European nation, tied up in financial institutions,” said Benediktsson, a former prime minister who will now take over at the Finance Ministry, in an interview on Thursday “And we in the three parties are ready to shake loose this capital to use it toward an infrastructure build up.”

The government owns most of Landsbankinn and all of Islandsbanki and has a stake in Arion. The banking assets were acquired after the 2008 collapse when the government stepped in to save the financial industry. The crisis is now largely in the rear-view mirror and the new government is being handed a booming economy.

The government will now put together a white paper on the financial system and have a broad discussion in parliament.

There are signs that the economy may be cooling after growing at a whopping 7.4 percent last year. Economist surveyed by Bloomberg are forecasting gross domestic product growth at 4.2 percent this year, while the central bank recently lowered its forecast for 2018 to 3.4 percent from 5.5 percent.

Internally, the government may find it hard to reconcile the policies of its two biggest party's, the Left Greens and the Independence Party. But both party leaders on Thursday insisted they would make it work.

“The outer circumstances are working in our favor in forming this government,” Benediktsson. “We are the European nation that is growing at one of the fastest rates — we have no unemployment in Iceland to speak of, we have a budget surplus since 2014 and forecasts predict continuing growth, a great increase in tourism next year.” 

Taking over as prime minister will be Left Green leader Katrin Jakobsdottir, the first time the party holds the top spot after emerging as the second biggest group in October's election. While she faced some internal party turmoil for joining with the Conservatives, she is now “optimistic but realistic” that she can make it work. 

The party failed to win support for a wealth tax, but was able to increase the capital gains tax to 22 percent from 20 percent as part of the government talks. The new government is also shelving a planned increase on VAT on tourist services.

"This is not a left wing government,” she said in an interview Thursday. “A left wing government was of course not on the horizon after these elections, there was always a broader underlying coalition.”

To contact the reporter on this story: Ragnhildur Sigurdardottir in Reykjavik at rsigurdardot@bloomberg.net.

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Nick Rigillo

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