Iceland forms center-right gov't, halts EU talks

[May 23, 2013]  REYKJAVIK, Iceland (AP) -- The leader of the center-right Progressive Party was chosen as Iceland's new prime minister Wednesday and promptly announced a halt to talks with the European Union about joining the 27-nation bloc.

Sigmundur David Gunnlaugsson spoke about the policy shift at a press conference after being selected premier.

"The government intends to halt negotiations between Iceland and the European Union," he said. "We will not hold further negotiations with the European Union without prior referendum."

Iceland has engaged in on-and-off talks with the EU for several years. Gunnlaugsson's party has been opposed, in part because members fear that joining would mean giving up control of Iceland's vital fishing stocks.

The new government will also include Bjarni Benediktsson, head of the conservative Independent Party, who will serve as minister of finance.

Icelanders voted April 27, returning to power the parties who had governed for decades before the 2008 economic collapse, the Independents and the Progressive Party.

The two parties had ruled together from 1995 until the 2008 fiasco. After the collapse of the Icelandic banking sector that year, Icelanders voted in a liberal government led by the Social Democrats and the Left-Greens.

The small North Atlantic nation with a population of 320,000 went from economic powerhouse to financial disaster almost overnight when its main commercial banks collapsed within a week in 2008. The value of the country's currency plummeted, while inflation and unemployment figures soared. Iceland was forced to seek a bailout from Europe and the International Monetary Fund.

The Progressive Party promised during the campaign to cut Icelanders' housing debts by 20 percent.

"The government keeps open the option of creating a special adjustment fund to achieve its goals," Gunnlaugsson said, promising further details soon.

That fund would help reduce loans taken out in foreign currencies, which soared as the Icelandic krona depreciated. Many Icelanders took out mortgages and car loans in foreign currencies prior to the financial collapse.

The government will also focus on lowering taxes and lifting capital controls to increase foreign investment.

Gunnlaugsson has said in the past that foreign creditors of Iceland's collapsed banks will likely need to suffer a substantial "haircut" -- or reduction -- on claims denominated in Icelandic currency. Details of any potential new plan for dealing with foreign creditors have not yet been announced.

[Associated Press; By JENNA GOTTLIEB]

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