Iceland PM is first global political casualty of the crunch

Iceland's embattled Prime Minister Geir Haarde may have become the first political casualty of the global credit crisis, announcing his resignation yesterday, and clearing the way for elections in May. Illness was the official reason for Mr Haarde's decision to quit, but few in the capital Reykjavik were in any doubt that his departure was linked to a week of intense and violent public protests at once prosperous Iceland's economic implosion.

Since October's financial earthquake Icelanders have vented their frustration, anger and despair in peaceful weekly protests. But demonstrations turned violent on Thursday, leading to 22 arrests and the worst civilian unrest since Iceland joined Nato in 1949.

The tensions prompted the government's first admission since October that Iceland needs a change of leadership if it is to rebuild its fractured economy and overhaul its discredited political culture, viewed by many Icelanders as corrupt and nepotistic.

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Yesterday afternoon the nation's airwaves were filled with sympathy for the Prime Minister's cancer, but the reason he offered was also derided by some as a clever way for him to slip out of the political hotseat with dignity.

"It is a little bit cheap," said Gudbjartur Hannesson, a member of parliament for Samfylking in the Social Democratic party, the junior partner in the ruling coalition with Mr Haarde's conservative Independence party. "It would be very strange if you could leave behind all the things that have happened and all the bad decisions just by changing one name and one person."

Moments after the announcement that Mr Haarde had fallen on his sword, a group of protesters regrouped in front of the parliament building, banging pots and pans, but the atmosphere was more joyous than on previous nights.

Iceland's rapid decline from a nation which in 2007 topped the United Nation's Human Development Index to a country on its knees, holding out a begging bowl to donors, escalated last October when the country's three main banks Glitnir, Landsbanki and Kaupthing were nationalised in quick succession and then placed into receivership. When the British Government invoked terror laws to freeze the assets of Landsbanki's British subsidiary Icesave, Kaupthing Sieger & Friedlander and Icelandic government assets in the UK, the resulting lack of liquidity sealed the country's descent into financial oblivion. "Many people have lost absolutely everything. Yet we have been told nothing and given no timeline for the future," said Hordur Torfason, a musician and human rights campaigner, who has been organising the protests.

Although Iceland's economic collapse was swift and brutal, most of those who lost their jobs in October received their final pay cheque at the start of this month. As their savings dwindle down to a few krona, each one worth a fraction of its former value, tempers have frayed.

The profile of the demonstrators has been unusual in that all ages and socio-economic groups in the population of 320,000 were represented. "Respectable people have been protesting and supporting the protests," observed Sigridur Ingibjorg Ingadottir, a former director of the Icelandic Central Bank and the only economist to resign after the collapse. She said her elderly conservative father, who would never in his life have considered taking to the streets, was among the crowds.

Mrs Ingadottir and others insisted the government had misinterpreted the protests in narrow economic terms.

Many Icelanders also expressed shame and disappointment that the protests ended in violence and blamed drunks and known criminals.

Though all eyes are on Mr Haarde this weekend, the real focus of the wrath is David Oddsson, the longest-serving former prime minister of Iceland and current chairman of the Central Bank's board of governors.

It was on Mr Oddsson's watch between 1991 and 2004 that his ruling Independence party intensified the hands-off approach to financial regulation which saw Iceland's economy bloat to 10 times the size of its GDP.

He has been a hate figure since the collapse, leaving Iceland all but bankrupt, with debts of $8bn and hefty loans to service. But Mr Oddsson refuses to step down. Another result of the crisis is that there is now widespread support for Iceland to apply for EU membership.