ANALYSIS-Shaken by crisis, Icelanders seek new beginning

REYKJAVIK, Jan 28 (Reuters) - Their economy is in ruins and their government has collapsed, but Icelanders see a rare opportunity in all the misfortune: a chance to overhaul how business is done on the volcanic island.

For decades the North Atlantic nation of just 320,000 people has been run by a tight-knit group of political and economic power-brokers. But the ruling elite has been tainted by their role in a financial meltdown that stands out, even by world standards, for its speed and scale.

"I just hope that we can build a new government with a new constitution and no 'I'll scratch your back, you scratch mine' kind of game-playing involved," said Elva Benediktsdottir, a business lawyer.

The shake-out could benefit grassroots movements, which drove street protests that helped topple the government and are now looking to launch a new political party.

As the economy boomed, making Iceland one of the richest countries per capita in 2007, few questioned a system which appeared to bring so much prosperity. But after a debt crisis that led to the collapse of Iceland's main commercial banks and is expected to plunge the country into a deep recession this year, many now question the cosy arrangement.

"I think the present crisis gives us the best shot we've ever had of doing something about this, because it is not a very healthy characteristic of Iceland and Icelandic politics, these close ties," said Gunnar Helgi Kristinsson, a professor of political science at the University of Iceland.

"And the outrage that actually brought down the last government has partly to do with this."

The intertwined nature of Icelandic society was also evident in the complex web of cross-ownership which characterised much of the island's economy, often making decision-making opaque.

With the economy in tatters due to the crisis, Iceland was forced to seek an IMF-led bailout totalling $10 billion in loans and aid. Protests have become a regular fixture in the once-tranquil streets of Reykjavik.


Former Prime Minister Geir Haarde's Independence Party, for decades Iceland's biggest and most influential party, is the target of much of the popular ire.

"I think the Independence Party must be held responsible for what has happened," said Sigridur Thorsteinsdottir, a parking attendant. "I would just like some new blood and want to see new people govern the country."

Haarde quit on Monday and demonstrators have also called for the resignation of central bank chief David Oddsson who previously, as Iceland's longest-serving prime minister, led the financial deregulation underpinning the decade-long boom that has now gone bust.

A recent opinion poll in Icelandic daily Frettabladid showed support for the Independence Party at 22 percent, down from 37 in the last election. Support for its previous coalition partner, the Social Democratic Alliance, has also plunged.

Instead, the opposition Left-Green Party, which has never been part of government, looks set to take the driver's seat after early elections, the exact timing of which for now is uncertain. Polls suggest they will become the biggest party.

But there are also indications Icelanders may be turning away from their established political parties, all seen as part of a leadership that failed to stave off the island's worst economic crisis.

"It is a big misunderstanding within the opposition parties that we would want them to take over," said Bjorgvin Mar Kristinsson, a teacher. "We don't want them at all either. New people and a new democracy is our demand."

Grassroots movements have organised many of the anti-government demonstrations and might fill the power vacuum left by the diminished support for the island's traditional political parties, Kristinsson said.

"There is no doubt there is some room there," he said. "The old parties have lost a lot of their credibility. Lots of their former supporters are looking for something new and clean."

Some of the protest groups have already begun preparing to form a political party that might run in early elections. All parties agree there should be a ballot within months

Hallfridur Thorarinsdottir, an anthropologist and a representative of one of the grassroot movements, said an official party would be founded in the next few days.

"We wanted to see if we could unite the many grassroot movements in Iceland around some basic issues we think are critical to form a better society here," she told Reuters.

"We found that people are in agreement on basic issues such as the desperate need for a new and changed constitution." (Additional reporting by Omar R. Valdimarsson; Writing by Niklas Pollard, editing by Mark Trevelyan)