Iceland's government collapses

Iceland’s coalition government collapsed today leaving the country reeling in the wake of the financial crisis that wrecked its economy.

Prime Minister Geir Haarde said he could not agree demands from partners in the Social Democratic Alliance Party.

Foreign Minister Ingibjorg Gisladottir, who heads the Social Democrats, is expected to start talks immediately with opposition parties in an attempt to form a new government.

Mr Haarde, who was diagnosed with throat cancer last week, said he had proposed Education Minister Thorgerdur Katrin Gunnarsdottir, from his own party, as new prime minister – but Ms Gisladottir rejected that offer.

“It was an unreasonable demand for the smaller party to demand the premiership over the larger party,” Mr Haarde said.

Iceland has been in crisis since the collapse of the country’s banks under the weight of debts amassed during years of rapid expansion. Inflation and unemployment have soared, and the krona currency has plummeted.

Mr Haarde’s government has nationalised banks and negotiated about €10bn in loans from the IMF and individual countries. In addition, Iceland faces a bill likely to run to billions to repay thousands of Europeans who held accounts with subsidiaries of collapsed Icelandic banks.

The country’s commerce minister, Bjorgvin Sigurdsson, quit yesterday citing the pressures of the economic collapse. Mr Sigurdsson, a member of Ms Gisladottir’s party, said Icelanders had lost trust in their political leadership.

Thousands have joined noisy daily protests in the last week over soaring unemployment and rising prices.