January 27, 2009 / 9:07 AM / 10 years ago

Iceland begins building new government

REYKJAVIK (Reuters) - Iceland’s president gave the Social Democrats a mandate on Tuesday to form a new government with opposition parties to tackle a crisis that has abruptly shattered decades of rising prosperity.

Iceland's President Olafur Ragnar Grimsson (R), Chairman of the Social Democratic Alliance Ingibjorg Gisladottir (C) and Chairman of the Left-Green Party Steingrimur Sigfusson leave after a news conference in Reykjavik January 27, 2009. REUTERS/Ints Kalnins

Prime Minister Geir Haarde resigned on Monday after his coalition with the Social Democratic Alliance (SDA) collapsed under pressure from sometimes violent protests — becoming the first leader to fall as a direct result of the global economic crisis.

The SDA, with 18 of 63 parliamentary seats, is the second biggest party after Haarde’s Independence Party and has long favored seeking membership of the European Union, in contrast to the EU-skeptic Independents.

President Olafur Ragnar Grimsson said he had asked Ingibjorg Gisladottir, foreign minister under Haarde and head of the SDA, to take the lead on forming a government.

“I have decided to ask the leaders of the Social Democratic Alliance and the Left-Green party to engage in conversation about forming a new minority government backed by the Progressive Party,” he told reporters at his residence.

Grimsson said elections may be held between April and June.

He also suggested the head of the central bank, David Oddsson, may be on the way out. Protesters have criticized Oddsson, a former prime minister, for not doing enough.

“In discussions and deliberations with leaders of the parties which will form the new government in a few days, it is absolutely clear that one of the pillars of the new program will be a change in the leadership of the central bank,” Grimsson told the British Broadcasting Corp.

BOOM TO BUST

Gisladottir said she was hoping for a political deal by the weekend, while Left-Green leader Steingrimur Sigfusson told Reuters talks had been proceeding well and that he expected a deal by the second half of the week.

Gisladottir, who recently had treatment for a benign brain tumor, appeared on Monday to rule herself out from becoming prime minister. She said she planned to take a leave of absence for one or two months, and proposed Social Affairs Minister Johanna Sigurdardottir as a candidate instead.

Coalition talks must bridge a number of differences central to the future of a country, once relatively poor, which began to thrive in the 1950s with the establishment there of a U.S. Cold War base. In the 1990s it built a booming financial industry, which quickly collapsed with the onset of global crisis.

“Forming a new government should not take long. I believe that informal talks about the new government had been going on for a longer time than the political leaders are willing to acknowledge,” said University of Iceland professor of politics Baldur Thorhallsson.

The Left-Greens are more cautious about EU membership than the Social Democrats. Sigfusson has also struck a populist note and called for new negotiations with the International Monetary Fund (IMF) on a multi-billion-dollar loan.

While Iceland needs the cash to rebuild its financial system, the aid has come at a cost. Among other things, the IMF pushed Iceland to raise interest rates sharply in November, even as the country’s economic woe was spreading.

Protests have become a regular fixture in the usually tranquil nation of 320,000. Polls show both former coalition parties trailing the Left-Greens, suggesting a shift in power is likely in the event of an early election.

The global financial crisis hit the North Atlantic nation in October, ending a decade of rising prosperity by triggering a collapse in the currency and financial system.

To stay afloat last year, Iceland secured $10 billion in financial aid from the IMF and several European countries. But trade in the island’s currency is effectively frozen.

Slideshow (5 Images)

Credit ratings agency Fitch said it viewed the commitment of any new Icelandic government to the existing IMF deal as central to maintaining the country’s battered BBB- credit rating.

Iceland’s leaders also received a fresh reminder on Tuesday of how dire economic conditions have become.

Consumer confidence this month plunged to the lowest since measurements began in 2001, falling 23 percent from the prior month and 83 percent from a year earlier, according to Gallup.

Additional reporting by Kristin Arna Bragadottir and Omar R. Valdimarsson; Editing by Katie Nguyen

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