The Man Who Predicted Iceland's Crash Says Don't Fear New Regime

(Bloomberg) -- Iceland may soon have a radically new coalition government, led by a young leftist who will rely on support from the anti-establishment Pirate Party for the slimmest of majorities.

According to the man who was among the first to warn of Iceland’s economic meltdown in 2008, investors now have nothing to panic about.

"Iceland will not be a fundamentally different country to the one it is today," said Lars Christensen, founder and chief executive officer of Markets and Money Advisory.

Despite a series of scandals that have shifted the balance of power from right to left, Christensen expects a degree of continuity with the policies of outgoing Prime Minister Bjarni Benediktsson, whose government has steered Iceland’s exit from crisis-era capital controls.

After entering its 2008 economic collapse rated AAA at Moody’s Investors Service, Iceland’s subsequent fall from ratings grace sent it as low as Baa3 in 2009. That’s since been partially reversed and the country now carries an A3 grade at Moody’s, with a stable outlook. S&P Global Ratings ranks Iceland A, and Fitch gives it an A- rating.

Coalition Talks

Left Green Movement leader Katrin Jakobsdottir was first to be handed a mandate to form a ruling coalition after the Oct. 28 snap election. Though her party came second in the polls, behind the conservative Independence Party, President Gudni Th. Johannesson judged that Jakobsdottir had a better chance of cobbling together a majority in parliament.

Talks between the Left Greens and the Social Democrats, the centrist Progressive Party and the never-been-in-government-before Pirates collapsed on Monday as lawmakers decided their majority would be too slim. Together, they control 32 of 63 seats in parliament. Jakobsdottir is now trying other constellations and is due to brief reporters later in the day.

The Man Who Predicted Iceland's Crash Says Don't Fear New Regime

A year ago (which is the last time Iceland held snap elections triggered by political scandal), three party leaders took turns at trying to put together a ruling coalition over a two-month period.

According to Fitch Ratings, "four-way talks will be complex and are not certain to succeed." Still, "a fragile coalition or a minority government is possible," it said in a note published on Friday.

Iceland has bounced back from the Great Recession. After contracting about 7 percent in 2009, the economy grew more than 7 percent in 2016, and Fitch is predicting growth rates of 5.6 percent this year and 4.2 percent the next.

Challenges Ahead

If Iceland’s history of booms and busts is any guide, the next administration can’t take continued growth for granted.

According to Fitch, "any incoming government may be called on to manage the potential risk of an overheating tourism industry, which is driving economic growth but also fueling rapid house price increases."

Christensen points to excessive wage growth, with its associated risks for inflation and monetary policy. But he says investors should be reassured by the Nordic take on leftist policies.

"We’ve seen in other Nordic countries that center-left governments often go on to pursue relatively free market, reformist ideas," he said.

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