Iceland turns 90 facing grave risks

Iceland marked the 90th anniversary of its autonomy on Monday with its economy in ruins, its confidence fading fast and its future uncertain.

The island nation faces pressing problems concerning its immediate economic situation and strategic, long-term questions over whether to stay independent or try to join the EU.

Ravaged by the global financial crisis, Iceland's three top banks collapsed in October, an emphatic end to an era of cheap foreign funding which had driven a decade-long economic boom.

"Our situation has never been worse in 90 years... and most people still don't realise how serious it is," said Vilhjalmur Bjarnason, a professor of finance at the University of Iceland.

"We can't really see the end of what is happening right now," said researcher Andrea Gudbjorg from opinion polling company Capacent. "There are no signs of a turnaround."

Iceland's 320,000 residents, among the most affluent in the world, are staring at a protracted recession with the economy seen shrinking 10 per cent next year. Construction sites around Reykjavik have been deserted and unemployment is set to soar.

About 2,000 people, fewer than in some previous rallies, staged a peaceful anti-government demonstration on Monday, the 90th anniversary of Iceland's declaration of autonomy from Denmark. Full independence was won in 1944.

They chanted "away with the corrupt government" and about 100 protesters entered the lobby of the central bank, but left after about an hour when they found out the bank's governor was not inside, Icelandic public radio said.

"We demand justice," protester Margret Peters said. "Greed has engulfed everything, that is why we protest today."

Prime Minister Geir Haarde is under growing pressure to resign, blamed by many for failing to spot the warning signs of the economic collapse and major lapses in regulations.

"The government has slept through this entire crisis," said Jonina Sigurjous, a nurse. "How could it get so bad? We never had to worry about things like the crown (currency) or jobs."

Consumer confidence has plummeted and the once high-flying Icelandic crown has effectively ceased trading.

To prevent an outflow of capital which would further weaken the crown, Icelanders can only buy limited amounts of foreign currency at their banks after presenting a valid ticket to go abroad. Store shelves are kept full only because importers of food and medicine buy hard currencies from the central bank.

Interest rates have been raised to 18 per cent to contain runaway inflation and bolster the crown, but risk setting off a wave of defaults by indebted Icelanders and their companies.

The economic meltdown has stirred a longing for more security among traditionally go-it-alone Icelanders.

Polls show a majority backing EU accession and adoption of the euro, forcing eurosceptic Prime Minister Haarde to promise another look into the merits of joining. Iceland abides by the EU's economic rules but many feel membership would hurt its fishing interests.

Strategically located between the Soviet Union's northern ports and the US, Nato-member Iceland was protected by Washington during the Cold War. But its geopolitical status has largely faded with the US military base closing in 2006.