Iceland nears center-left deal, EU offers hope

Iceland's Parliament house in Reykjavik January 26, 2009.

REYKJAVIK (Reuters) - Two Icelandic parties aimed to forge a new center-left government on Friday, while a European Union official said the crisis-hit country could move swiftly toward EU membership if it decided to apply.

Though Iceland has long been cautious about entering the EU, support for the idea has risen after its economy collapsed last year under the weight of billions of dollars of foreign debts, racked up by its ambitious -- but now bankrupt -- banks.

Protests over the crisis, which forced Iceland to take a $10 billion IMF-led rescue, drove the previous government to quit. Prime Minister Geir Haarde of the Independence Party stepped down on Monday, the first political leader to fall as a direct result of the global credit crunch.

The Social Democrats and the Left-Greens are now negotiating on a new government, expected to lead the nation to new elections between April and June.

"The negotiations are probably going to go on for several hours," said a spokesman for Left-Green leader Steingrimmur Sigfusson after talks resumed on Friday morning.

He said the parties still expected a deal later on Friday, as prospective prime minister Johanna Sigurdardottir of the Social Democrats had said on Thursday. Newspaper Morgunbladid quoted a source as saying that a news conference to announce the new government was due at 1800 GMT.

Sigurdardottir, 66, social affairs minister in the outgoing administration, had said she expected the government formally to take office on Saturday. The Social Democrats favor EU entry. The Left-Greens are cautious, though have said they could back a referendum on starting talks.

EU Enlargement Commissioner Olli Rehn told British newspaper The Guardian that Iceland could win early EU membership.

"If Iceland applies shortly and the negotiations are rapid, Croatia and Iceland could join the EU in parallel," he said. Croatia hopes to conclude accession talks with the bloc later this year and to join in 2011.

Rehn's spokeswoman said Iceland's entry would be helped by its membership of the European Economic Area, the zone that includes the EU's 27 states plus Iceland, Liechtenstein and Norway.

A tough issue would be access to Iceland's rich fishing waters, crucial to the island's economy. The country has traditionally been reluctant to share them.

CENTRAL BANK WOES

The Social Democrats and the Left-Greens have agreed a key task would be to dismiss the leadership of the central bank, widely criticized for failing to prevent the crisis.

One name mentioned in local media as new central bank chief is Mar Gudmundsson, now deputy head of the monetary and economic department of the Bank for International Settlements in Basel.

But he told newspaper Frettabladid he had not been offered the job. "It would depend on a lot of things, among others whether the timing would suit me and how secure the surrounding factors are," he said.

The new minister for commerce is set to be Gylfi Magnusson, economy professor at the University of Iceland. He told broadcaster RUV he had been offered the job and accepted.

The Social Democrats were the junior party in the old coalition, while the opposition Left-Greens now lead opinion polls. Sigfusson has also backed a renegotiation of the IMF loan.

(Additional reporting by Omar R. Valdimarsson and Kristin Arna Bragadottir, editing by Mark Trevelyan)