Following Financial Meltdown, Iceland’s Government Collapses

Prime Minister Geir Haarde said he was unwilling to meet the
demands of coalition partners Social Democratic Alliance Party, which insisted
upon taking his post to keep the coalition intact. ”It was an unreasonable
demand for the smaller party to demand the premiership over the larger party,”
he said.

Haarde said Friday he would not seek re-election because he
has cancer, and had proposed an early parliamentary election on May 9. He said
he wanted to keep running Iceland until the vote, but said Monday he would hand
in his resignation to President Olafur Ragnar Grimsson after talks to save the
coalition government failed.

Developments on Monday were uncertain with all political
parties jockeying for position to replace Haarde’s coalition.

“I really regret that we could not continue with this
coalition. I believe that that would have been the best result,” Haarde
told reporters.

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. That government would sit until new elections
are held.

The global financial crisis pummeled Iceland in October,
ending a decade of rising prosperity in a matter of days by triggering a
collapse in the currency and financial system.

Haarde’s coalition government, led by his Independence
Party, has since been under intense pressure as protests over the economic
situation have been a regular fixture in the usually tranquil nation of
320,000.

Iceland’s banks collapsed under the weight of debts amassed
during years of rapid expansion. Inflation and unemployment have soared, and
the krona currency has plummeted.

Haarde’s government has nationalized banks and negotiated
about $10 billion in loans from the International Monetary Fund and individual
countries. In addition, Iceland faces a bill likely to run to billions of
dollars to repay thousands of Europeans who held accounts with subsidiaries of
collapsed Icelandic banks.

The country’s commerce minister, Bjorgvin Sigurdsson, quit
on Sunday citing the pressures of the economic collapse. Sigurdsson, a member
of Gisladottir’s party, said Icelanders had lost trust in their political
leadership.

Thousands have joined noisy daily protests in the last week
over soaring unemployment and rising prices.

Gisladottir, who had been considered a potential successor
to Haarde, announced she would not seek to be prime minister and would take a
leave of absence for one or two months. She was in Sweden last week undergoing
treatment for a brain tumor.

Gisladottir had several meetings with Haarde over the
weekend and on Monday to discuss her conditions to keep their coalition alive.
She had demanded to be prime minister until the election, but on Monday she
proposed that Social Affairs Minister Johanna Sigurdardottir take the job
instead.

Haarde said he hoped someone from his party could lead a
unity government but one analyst said he thought the public would demand
change.

“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,” said Lars Christensen, head of emerging
market research at Danske Bank, according to Reuters.

“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.”

Polls show both coalition parties trailing the opposition
Left-Green Party, indicating that a shift in power is likely. It was unclear on
Monday 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 Althing parliament after the news the government had fallen.

“We are very happy and optimistic today. I think the
public deserves a celebration, but of course we realize that there are troubled
times ahead and not all our demands have been met,” playwright Snorri
Hauksson told Reuters.

The new government will face increasingly tough challenges,
with the island nation’s economy forecast to shrink by almost 10 percent this
year, the BBC reported.