Crippled Iceland set to vote

Creditors of Iceland's failed banks are set to lose about $US3.6 billion no matter which party wins next month's parliamentary elections.

Creditors of Iceland's failed banks are set to lose about $US3.6 billion no matter which party wins next month's parliamentary elections.

"Everyone realises that these krona claims will be written down - in one way or another," Bjarni Benediktsson, head of the Independence Party, the largest opposition group, said in an interview. "The winding-up proceedings of the failed bank estates will be completed using a completely different, and much weaker, exchange rate than the official one."

Icelanders head to the polls on April 27, four years after the Social Democratic-led government ousted its pro-deregulation predecessor following protests over economic mismanagement. The country's three largest banks defaulted on $US85 billion in debt in 2008, sending the economy into its worst recession in six decades and the krona into free fall.

Most polls suggest the government of Prime Minister Johanna Sigurdardottir, who also backs write-downs on bank creditors' krona claims, won't be re-elected.

Central bank governor Mar Gudmundsson said the krona assets would need to be written down to a "considerable degree" as the currency was under "considerable" pressure.

The krona has lost about 10 per cent against the euro since an August peak. It is down 4 per cent versus the dollar in the same period. That's spurred inflation, and left households worse off. More than 80 per cent of the nation's private debt is linked to consumer prices.

The public interests would "take priority over" the creditors, Arni Pall Arnason, leader of the ruling Social Democratic Alliance, said in an interview. "We need to make sure that we don't create a system of relentless outflow pressures, which could lead to a downward spiral of the exchange rate with a resulting negative impact on the domestic economy."

"The first task of a new government after April 27 will be to complete a comprehensive evaluation of the country's balance of payments, in light of the payments from the estates of the banks, and also taking into account other factors," Mr Arnason said.

"That government will have to seek a broad political agreement on how to proceed. It's best to leave an issue like this until after an election."

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