REYKJAVIK - Iceland's government sought to avoid early elections on Wednesday by picking a replacement for the prime minister who stepped aside over links to an offshore company, as the "Panama Papers" leaks cast the tiny country into a political maelstrom.
Sigmundur David Gunnlaugsson exited on Tuesday after leaked documents from a Panamanian law firm showed his wife owned millions of dollars worth of previously undisclosed shares in a company that held debt from failed Icelandic banks.
Picking a new prime minister could allow the ruling coalition to remain in power, but the opposition is trying to force a new election with a vote of no confidence in the government, which could lead to a radical political shift.
Polls show the anti-establishment Pirate Party in the lead if a new election is called in the country of 330,000 people, a result with potentially wider impact across Europe where mainstream political parties are fending off populists from both the left and right.
The Panama documents revealed that Gunnlaugsson's wife owned a previously undisclosed firm with claims on the island's collapsed banks. His opponents say that represents a conflict of interest because the government is playing a central role in negotiating the value of such claims.
More than 10,000 people showed up earlier in the week to demand Gunnlaugsson's resignation, although protests dwindled late on Tuesday.
Iceland has struggled to recover from the 2008 collapse of its highly indebted banks, which led to popular protests, the fall of a government and the jailing of many bankers.
The ruling Progressive Party's deputy leader, Sigurdur Ingi Johannsson, said on Tuesday his party had proposed to its junior coalition partner, the Independence Party, that he become the new prime minister. That requires a formal decision by the government, which was expected to meet later on Wednesday.
However, there were signs that a transition would not be smooth. A statement emailed on Tuesday night by government spokesman Sigurdur Jonsson said Gunnlaugsson had suggested that Johannsson take over as prime minister "for an unspecified amount of time". "The prime minister has not resigned and will continue to serve as chairman of the Progressive Party," it said.
Opposition politicians are standing their ground, calling for a vote of no-confidence. While the government has a parliamentary majority, it is not clear whether all its members would now support it. "It is clear our demand for new elections still stands,"Left Green Party leader Katrín Jakobsdottir told Reuters late on Tuesday.
A poll conducted by Icelandic media outlet Visir on Monday and Tuesday showed 43 per cent would vote for the Pirate Party if elections were held now, giving the anti-establishment group a stunning victory. Some 69 per cent of those who answered want finance minister Bjarni Benediktsson to resign.
The Pirate Party, which campaigns in favour of transparency, direct democracy and reform of copyright laws, has had a small following in several European countries for a number of years but has never come close to political power before.
The leaked documents from a Panamanian law firm that specialises in setting up offshore companies were unveiled this week by new organisations around the world. Stories from the documents have shone a light on the finances of politicians and public figures from around the world, causing public outrage over how the powerful are able to hide money and avoid tax.
An Iceland government spokesman has said the claims against Iceland's collapsed banks held by the firm owned by the prime minister's wife, in which he also temporarily held a stake, totalled more than 500 million Icelandic crowns (S$5.4 million).
Gunnlaugsson has said his wife's assets were taxed in Iceland but Icelanders are angry over the conflict of interest and say the holdings should have been disclosed.