January 25, 2009 8:15 pm

Cracks widen in Iceland as minister quits

Iceland’s government started to fracture on Sunday as its commerce minister resigned two days after Geir Haarde stepped down as prime minister after disclosing that he was suffering from cancer.

Bjorgvin Sigurdsson, a member of the Social Democratic party, the junior member of Iceland’s two-party coalition led by the Independence party, said he had resigned the trade brief to indicate responsibility for the country’s financial crisis.

Mr Haarde has called for an early election in May, but if more Social Democratic members of the cabinet step down, the coalition could collapse and the government be forced into an even earlier poll.

Ingibjorg Gisladottir, foreign minister and leader of the Social Democrats, has so far backed Mr Haarde’s call for an election in the spring, but her stance could alter as public pressure for an immediate election grows.

As the momentum for an early poll builds, there are considerable uncertainties over the impact it would have on the country’s economic performance.

Iceland is suffering the most serious crisis in its recent history, with its economy expected to contract by 10 per cent this year and capital controls in force that prevent its currency from trading internationally.

An opinion poll by MMR has revealed the Left-Green Movement would win any election with 28.5 per cent of the vote, compared with 24.3 per cent for Mr Haarde’s Independence party and 17 per cent for the Social Democrats.

A dramatic shift to the left could seriously undermine already extremely fragile international confidence in Iceland’s currency and trigger massive capital flight as investors bail out.

The central bank estimates international investors own up to IKr400bn ($3.2bn, €2.5bn, £2.4bn) of Icelandic bonds that could be withdrawn once its currency is fully refloated.

The absence of political stability and uncertainty over the ability of any new government to implement an economic rescue package devised by the International Monetary Fund as part of a $6bn rescue package could encourage capital flight.

As the government coalition shows signs of disintegrating, the Social Democratic party is starting to apply pressure on senior members of the country’s main financial regulator and central bank to step down.

Mr Sigurdsson, 38, said on Sunday that he had called for the management of the Financial Supervisory Authority to resign.

Meanwhile, on Icelandic radio Ms Gisladottir suggested that David Oddsson, governor of the central bank, should step down.

Demands for heads to roll will prove popular with the Icelandic public.

Thousands of demonstrators have gathered outside parliament and the central bank in recent weeks and demanded senior policy makers and regulators take responsibility for the crisis.

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