REYKJAVIK (Reuters) - Iceland's president called on the social democrats, junior partner in the outgoing coalition, to form a new government with opposition parties on Tuesday to tackle a crisis that has abruptly shattered decades of rising prosperity.
Prime Minister Geir Haarde resigned on Monday after his Independence Party's coalition with the Social Democratic Alliance (SDA) collapsed under pressure from mounting public anger and sometimes violent protests. In so doing, he won the distinction of 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 and has long favoured seeking membership of the European Union, in contrast to the EU-sceptic Independents.
President Olafur Ragnar Grimsson told reporters 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.
Gisladottir said she was hoping for agreement by the weekend, while Left-Green leader Steingrimur Sigfusson told Reuters talks had been proceeding well.
"We hope to have things pretty much ready by tomorrow regarding the agenda, the issues, but then (there are) party meetings to deal with," he said. "So probably in the second half of the week we will be ready."
BOOM TO BUST
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 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. Haarde had called for a snap May 9 election but that date is now uncertain.
"I am glad the government has fallen, but I would have liked to have elections earlier than in May," said retired sales clerk Sigurdur Sigurdsson.
"The flow of information has been terrible and we still don't know what's going on," he said.
Gisladottir, who recently had treatment for a benign brain tumour, appeared on Monday to rule herself out from becoming prime minister, saying she planned to take a leave of absence for one or two months. She proposed Social Affairs Minister Johanna Sigurdardottir as a candidate for prime minister.
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 international trade in the island's currency is effectively frozen.
Credit ratings agency Fitch said on Tuesday 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 for the island's 320,000 residents.
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 pollster Gallup.
(Additional reporting by Kristin Arna Bragadottir and Omar R. Valdimarsson)
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