David Cameron and Sigmundur David Gunnlaugsson
David Cameron and Sigmundur David Gunnlaugsson attend the Northern Future Forum in Reykjavik, October 29, 2015.REUTERS

Sigmundur Davíð Gunnlaugsson has announced he will step down as the Prime Minister of Iceland following the backlash to a leak associated with the so-called Panama Papers.

The story had been brewing since mid-March when Icelanders first heard of the fact that Gunnlaugsson's wife owned an offshore company in the British Virgin Islands. Although it is a well-known fact in Iceland that she is wealthy due to a family inheritance, it surprised many that she had chosen to keep her money outside of Iceland - and in a location which many Icelanders associate with tax avoidance. Moreover, it also turned out that her offshore company owned claims in the estates of the Icelandic banks that collapsed in October 2008.

Immediately, the couple reacted to the news by pointing out that taxes of all assets kept in the British Virgin Islands had always been paid in Iceland. Moreover they pointed out that the company was privately owned by Gunnlaugsson´s wife, thus making it unnecessary for him to declare it as his own on a formal declaration form all MPs are required to fill out about their financial interests.

Many took these explanations with a grain of salt. In particular, Gunnlaugsson had difficulties explaining why he had not informed anyone of the fact that his wife owned claims in the estates of the fallen banks; perhaps potentially violating a rule of public disclosure.

From the time Gunnlaugsson became the Prime Minister in 2013 and till the end of 2015, the Icelandic authorities had been engaged in tough and complicated negotiations with various entities that owned claims in the estates of the failed banks.

The authorities offered the claimants two options. Either they pay a heavy exit tax in exchange for any foreign currency they were allowed to take out of Iceland, or they would pay a more moderate stability contribution.

The claimants chose the second option. At the end of last year a final settlement was reached between all the major claimants and the Icelandic authorities. The settlement will enable Iceland to start lifting capital controls, which have been in place since November 2008. The settlement is also expected to bring a considerable amount of money into the state's coffers, which will enable Iceland to reduce its considerable public debt.

Overall, Iceland has been doing very well in economic terms in recent years. This is evidenced by strong economic growth, by low inflation and low unemployment rates as well as increases in real wages. In the polls the two government coalition parties, the centrist Progressive Party (led by Gunnlaugsson) and the right-of-centre Independence Party (led by Bjarni Benediktsson), have been doing reasonably well given the fact that since 2008 Icelandic voters hold politicians and established political parties in low regard.

Sigmundur David Gunnlaugsson
Sigmundur David Gunnlaugsson speaks to media outside Iceland president's residence in Reykjavik, April 5, 2016.REUTERS

The same polls have shown very limited support for the two former coalition parties, the Social Democratic Alliance and the Left Green Movement, whereas the alternative Pirate Party has been doing surprisingly well.

The Opposition reacted to the news about the offshore company by announcing before Easter that it would introduce a motion of no-confidence. At the time it seemed unlikely that such a motion would be passed because the coalition has a very solid parliamentary majority and government MPs seemed to fully support the Prime Minister.

But the political landscape changed on Sunday when the Icelandic State Broadcasting Company (RUV) broadcast a TV programme called the Panama Papers. Many viewed the Prime Minister to be dishonest or incompetent from its portrayal.

After the 2008 economic crisis there is very little tolerance in Iceland for either incompetent or lying politicians. Bjarni Benediktsson, the finance minister, reacted by privately pressing the Prime Minister to resign. On Monday afternoon some 20 thousand people protested in front of Parliament asking for the resignation of the Prime Minister or even the whole cabinet.

The Prime Minister held out until Tuesday afternoon (5 April) when he was finally convinced by his own parliamentary party that he should step down and hand over the leadership of the government to his deputy party chairman, Sigurður Ingi Jóhannson.

As things now stand it seems likely that the cabinet survives this political earthquake since the Independence Party appears willing to continue working with the Progressive Party. Voters, however, will have their say at the latest in April 2017 when the term ends. However, the Icelandic government has a job to do in ensuring people that if any evidence of tax evasion is found, it will not be dealt with lightly.


Stefanía Óskarsdóttir is an Associate Professor of Political Science at the University of Iceland. She specializes in the field of parliamentary democracy and democracy in Iceland in compartive terms. She appears frequently in the Icelandic media as a political analyst. She received her Ph.D. in political science from Purdue University, W-Lafayette, IN in 1995.