Panama Papers leak may hit Iceland’s economic policy

The Eyjafjallajškull volcano in Iceland.
Kerstin Langenberger | Barcroft Media | Getty Images
The Eyjafjallajškull volcano in Iceland.

The political turmoil in Iceland following the resignation of its prime minister last week could delay the country's long-awaited re-privatization of three major banks, the finance minister said on Tuesday.

Bjarni Benediktsson said holding legislative elections this year would likely delay Iceland's plans to sell stakes in the banks it bailed out after its financial crisis.

"It has become less realistic to privatize public shares in 2016 as we originally aimed for — I am referring to the fact that we are going to elections later this year," the minister of finance and economic affairs said at a conference in London.

Iceland is likely to bring forward its elections to the fall this year from April 2017, following the resignation of Prime Minister Sigmundur Gunnlaugsson. He was the first major public figure to resign in the wake of the so-called Panama Papers leaks, which showed that his family had sheltered money offshore.

Gunnlaugsson has repeatedly denied any wrongdoing.

Sigmundur David Gunnlaugsson
Timothy A. Clary | AFP | Getty Images
Sigmundur David Gunnlaugsson

Benediktsson was also named in the Panama Papers, but told Reuters on Tuesday that he would not be resigning as minister.

Benediktsson co-owned a company in Seychelles during Iceland's banking crisis, according to the International Consortium of Investigative Journalists that saw the leaked papers from Panama-based law firm Mossack Fonseca. CNBC has not been able to independently verify the allegations.

The Panama Papers revelations have knocked Iceland's confidence in its politicians further, with faith in the political and financial elite yet to recover from the country's 2008-2011 banking crisis.

Thousands of protesters took to the streets of Reykjavik, the Icelandic capital, last week. The populist Pirate Party, which advocates direct democracy and a change of the "old guard" in government, is leading in the polls.

It has not set out its macroeconomic policies in detail, so it is unclear whether a Pirate Party-led government would maintain the current government's commitment to capital control liberalization and breaking the economy's historic cycle of boom and bust.


Protests on April 5, 2016 in Reykjavik, Iceland.
Getty Images
Protests on April 5, 2016 in Reykjavik, Iceland.

"Clearly the political risk in Iceland is much higher than it was a month ago," Jon Danielsson, director of the Systemic Risk Centre at the London School of Economics, said at the conference on Tuesday.

"The problem with the Pirate Party is that nobody knows what they want… In a disaster scenario, I see a shattering of the current stability policies pursued," he later added.

Fitch Ratings said on Tuesday that the current crisis in Iceland increased policy uncertainty, but held the country's credit rating at "BBB+."

Bob Parker, senior adviser at Credit Suisse, compared Iceland's political situation favorably with that of the U.K. and the U.S.

"I think compared with what potentially America could experience with a (Donald) Trump presidency and compared with what we (the U.K.) might experience on June 24 — the day after the Brexit vote — I frankly think your (Iceland's) political issue last week was a hiccup," he said at the conference on Tuesday.

Follow CNBC International on Twitter and Facebook.