Despite recovery, Icelanders still feeling effects of crisis

Iceland may have exited recession, but as the country prepares to vote in Saturday's general election its people are still feeling the aftershocks of the island nation's worst-ever financial crisis.

On paper, the North Atlantic country has staged a remarkable recovery since its financial meltdown in 2008, when the collapse of its three top banks threatened to sink its economy.

Prime Minister Johanna Sigurdardottir can boast less than five percent unemployment, and economic growth last year reached 1.6 percent.

But the situation on the ground is more complex, with many Icelanders still struggling with household debt and unemployment.

The government -- widely expected to be voted out of office this week -- has been more concerned with repaying its lenders than helping ordinary people get back on their feet, they feel.

"I was working in an architecture and design office. A few weeks after the banks collapsed, all the employees were fired. I was unemployed for a year," said 51-year-old Elly Ragnarsdottir.

"I had to struggle with my bank to be allowed to stay in the house that I had bought. I negotiated a solution, but I feel like a hostage," she added.

Since 2010 Ragnarsdottir works for the city of Reykjavik in intranet management, "a completely different field" from the one she was trained for, on a lower salary than she had in 2008.

Her difficulties were compounded by an index-linked mortgage she took out at a time when banks offered nothing else.

All went well until the Icelandic currency was hit by the crisis and the krona plummeted, fuelling cost rises that plunged many home owners into the red.

One of the biggest accomplishments of the social democratic-led coalition has been a fall in unemployment.

Unemployment soared from 2.5 percent in June 2008 to more than 8 percent in early 2009. Having peaked at nine percent in May 2010, it stood at five percent in February this year.

However, many Icelanders are wary of those figures, citing an exodus of disgruntled youths and the exclusion of the long-term unemployed from the data. The statistics also fail to show how many people are underemployed and the number of people on disability benefits, they say.

Hannes Holmsteinn Gissurarson, a political science professor whose work has inspired the conservative Independence Party's political platform, slammed the sitting government's policies.

"It did the opposite to what a government is supposed to do in a financial downturn: it raised taxes, especially on wealth creation and job creation, and it stopped all investment," he said.

Critics say Iceland's capital controls, which severely restrict how much foreign currency a company can buy, has deterred foreign investment since they limit how much profit international firms can send home.

The government's austerity drive was largely designed to meet the demands of the International Monetary Fund, which lent Reykjavik 1.6 billion euros ($2.08 billion) between 2008 and 2011.

At the top of the Washington-based organisation's agenda was getting Iceland's budget deficit under control and a restructuring of its banking sector.

Although both criteria have been met, the fallout from the crisis has dominated the election campaign, mostly focusing on the issue of household debt.

One in 10 households is behind in their rent or mortgage payments, and more than a third of Icelanders (36 percent) would be unable to cope with an unforeseen cost of 1,000 euros, according to government data.

Among voters, there's a widespread feeling that those problems have been ignored by their government for the past four years.

Iceland has launched a household debt restructuring programme, but it's been hampered by the large amount of administration involved.

"When I lost my job I was unable to find any solution to my debt problems," Ragnarsdottir said, adding that she didn't qualify for the government programme.

"The solution came from my banker. It took two and a half years."

One of the two parties expected to form a coalition after this week's election, the centrist Progressive Party, is offering to relieve debt-laden households by easing mortgage repayment conditions to bring the amounts in line with what they were in 2008.

The idea has proved popular, but it's unclear what the impact would be on the banking sector and the economy.

Another party with strong support in the run-up to Saturday's vote, the Independence Party, has promised to introduce tax credits that would raise the standard of living.