Iceland goes into meltdown as crisis topples government

ICELAND's coalition government collapsed yesterday under the pressure of the economic crisis that has driven the nation to bankruptcy and political turmoil.

Geir Haarde, the Conservative prime minister, announced the resignation of the cabinet after he was unwilling to hand over the leadership to his coalition partners, the left-wing Social Democratic Alliance party.

The country has been in trouble since October, when its banks collapsed owing six times Iceland's entire economic output, resulting in rising unemployment and daily protests, including the recent stoning of the prime minister's car.

Iceland, once hailed by Alex Salmond, the First Minister, as part of the "arc of prosperity" of independent nations of which Scotland could be a part, had its banks' assets in Britain frozen by Gordon Brown,

The Prime Minister used anti-terrorism legislation to claw back some of the £1 billion owed to British councils, charities and police authorities that had invested funds in Icelandic banks when they promised returns of 10 per cent.

The government of Iceland had responded to the crisis by nationalising the leading banks and negotiating a $10 billion loan from the International Monetary Fund and donor countries in order to stay afloat.

But yesterday the prime minister said he was unwilling to meet demands from his coalition partners in the Social Democratic Alliance party, which insisted on holding the post of prime minister in order to keep the coalition intact.

Mr Haarde, who has been prime minister since 2006, said he would officially inform the country's president that the government had collapsed. He said: "It was an unreasonable demand for the smaller party to demand the premiership over the larger party."

Meanwhile, the country's foreign minister, Ingibjorg Gisladottir, who heads the Social Democrats, is expected to start talks immediately with opposition parties in an attempt to form a new government.

Last night, Lars Christensen, head of emerging market research at Danske Bank, said: "This is not unexpected and at least it is the end of the pain politically.

"I would view it as good news because it should give us more clarity rather than less. Obviously, the left wing is likely to get a very good showing in the election. The likely verdict of the Icelandic people is that they will want the current government well out of the way."

Mr Haarde had already said on Friday he would not seek re-election because he has cancer, and had proposed an early parliamentary election on 9 May.

But he said he wanted to keep running Iceland until the vote.

Polls show both coalition parties trailing the opposition Left-Green party, indicating that a shift in power is likely. It was unclear yesterday if elections would be held in May or earlier, or if a new coalition could be formed under the current mandate, which runs to 2011.

Jubilant protesters honked horns and banged pots and pans outside Iceland's parliament after the news the government had fallen.

The playwright Snorri Hauksson said: "We are very happy and optimistic today. I think the public deserves a celebration but, of course, we realise that there are troubled times ahead and not all our demands have been met."

Over the weekend, Mrs Gisladottir had several meetings with the prime minister to discuss her conditions to keep the coalition alive.

She had called for the resignation of the board of the central bank and its governor, David Oddsson.

Mrs Gisladottir had also demanded to be prime minister until the election, but yesterday she proposed the social affairs minister, Johanna Sigurdardottir, take the job instead.

Mr Haarde insisted that this position had been the final dealbreaker and that he had demanded one of his party members would lead a government.

Under the Icelandic constitution, the president is now charged with finding a new government with sufficient parliamentary backing.


WHAT NEXT

THERE are now three main possibilities for Iceland: a national unity government, a new coalition or a government of the old coalition partners, the Independents and Social Democratic Alliance (SDA).

Prime minister Geir Haarde's Independents have 25 of 63 parliamentary seats. The SDA has 18 seats. The next biggest faction is the Left-Green Party with nine seats. Polls show it is gaining popularity and its leader, Steingrimur Sigfusson, has thrown his hat in the ring as a possible prime minister.

"What is likely is a minority government of the SDA and the Leftist-Greens," said Gunnar Helgi Kristinsson, a professor of political science at the University of Iceland. But the potential hurdles are major. Prof Kristinsson said: "There are quite a few points which the two parties would have to agree on: the EU, the IMF and who should be prime minister."