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Monday, January 26, 2009

Iceland's Coalition Government Collapses

Iceland's government collapsed Monday, days after its prime minister called for early elections amid popular anger over a financial crisis that has gutted a once-flourishing economy.

Prime Minister Geir Haarde announced Monday that he and his cabinet would resign immediately. The move came after his Independence Party failed to come to terms with the Social Democrats, its main partner in Iceland's coalition government. Mr. Haarde was due Monday afternoon to present his resignation to Iceland's president.

Mr. Haarde was working to form a new government, his spokesman said, but Social Democrat leaders were demanding a fresh face.

Iceland's Prime Minister Geir Haarde, right, addresses journalists at the parliament in Reykjavik on  Monday.
Associated Press

Iceland's Prime Minister Geir Haarde, right, addresses journalists at the parliament in Reykjavik on Monday.

"The government's actions in the last weeks and months were not swift enough," Foreign Minister Ingibjorg Solrun Gisladottir, the leader of the Social Democrats, said Monday, according to Agence France-Presse.

It is far from clear who will run Iceland until elections scheduled for May. Ms. Gisladottir proposed a fellow Social Democrat, Johanna Sigurdardottir, but Mr. Haarde's spokesman said the Independence Party—which has a plurality of seats in parliament--is determined not to hand over the prime minister's office.

That could open the door for the Independence Party's second-in-command, Thorgerdur Katrin Gunnarsdottir, currently education minister.

Iceland's president, who holds a largely ceremonial post, has authority to designate a person responsible for forming a government.

How Iceland Collapsed


WSJ's Andy Jordan examines how Iceland's economic miracle came to an abrupt end and explains why the world should care about the collapse of the small country's financial system.

Iceland becomes the second European nation to lose its government in the global crisis -- Belgium's resigned last month after a scandal involving aid to a fallen bank. It is perhaps the world's hardest hit: Last fall, three big banks -- virtually the entire banking system -- collapsed, and the island's currency went into freefall.

The twin currency and banking crises have caused a startlingly swift reversal of fortune for Icelanders, per capita once one of the world's wealthiest people. Today, inflation and unemployment are soaring, debt is mounting and the banking sector that provided cushy jobs and fueled a consumption boom has vanished.

Anger at Iceland's leaders has been palpable for months. Protests in front of the parliament that began last fall drew crowds of thousands that quickly turned raucous—pelting the parliament building with eggs and rolls of toilet paper, and displaying effigies of Mr. Haarde.

Up until last week, Mr. Haarde had been defiant, saying Iceland—which has accepted a $2.1 billion bailout from the International Monetary Fund—could not afford political chaos as it tries to rebuild its economy.

But Friday, he said his doctors had discovered a tumor of the esophagus, and that he would call for early elections in May and stand down as the party's chief. Leaders of the protests said that wasn't enough. Demonstrations continued over the weekend. By Monday, the coalition had broken and Mr. Haarde faced open criticism from his partners.

At the root of Iceland's troubles was a outsized banking system, which grew wildly overseas and built up foreign liabilities many times the size of Iceland's economic output. When the credit crunch struck, the banks faced difficulty making payments, and Iceland's central bank didn't have the foreign currency needed to bail them out.

Write to Charles Forelle at