Things are starting to get rough...

ICELAND'S GOVERNMENT COLLAPSES

The global financial crisis felled its first major political victim on Monday, as the coalition government of Iceland collapsed a week after admitting the extent to which the freeze in financial markets had ruined its economy. This will add further to the pressure on a devastated economy, expected to shrink by nearly 10.0% this year and next.

"I really regret that we could not continue with this coalition," said Prime Minister Geir Haarde as he announced he would be officially informing the president of the collapse, and his resignation as prime minister. His Independence Party's partner in the governing coalition, the Social Democratic Alliance, had demanded the post of prime minister - a condition that Haarde said he was unable to meet. Haarde last week announced that he would be retiring as he battled cancer, at parliamentary elections scheduled for May 9.

The government withstood furious protests last year after the nationalization of three banks - Kaupthing, Glitnir, and Landsbanki - and collapse of the currency plunged the country into economic turmoil. However, the final straw seems to have been the latest admission of how serious the crisis really was. The finance ministry last week drastically cut its expectations for the next two years, predicting that gross domestic product would shrink by 9.6% in 2009 and 2010, after predicting a 1.6% contraction just in October. Inflation will rise as high as 13.1% this year against the previous prediction of 5.7%. At the weekend thousands of protesters gathered in capital city Reykjavik demanding that the government step down.

A $2.1 billion loan package from the International Monetary Fund, rates hikes to curb inflation, and campaigns by local celebrities such as singer Bjork, have done little to revive the economy, which got caught up in the financial crisis after its banks paid the penalty for their dependence on foreign wholesale borrowing.

The collapse leaves future leadership unclear: Foreign Minister Ingibjorg Gisladottir, the head of the Social Democrats, who had been considered a replacement, said she would not move to replace Haarde. Haarde's party could try to hash out a new coaltion, but that would be a struggle given its huge unpopularity.

"These latest developments mean that the country is currently without a government and no one can say with any certainty what happens next," said Gunnar Helgi Kristinsson at the University of Iceland.

The news had no impact on the currency markets, where trading in the krona was nonexistent. With the onshore market under control of the government, international trade has been extremely thin since October...
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