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Why Iceland’s prime minister just resigned over the Panama Papers leak

(Halldor Kolbeins/AFP/Getty Images)

Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson resigned Tuesday, after documents leaked by a law firm in Panama revealed that his wife had a secret offshore account with millions of dollars.

This money is housed in a shell corporation, Wintris, to which Icelandic banks owed money after the financial sector collapsed during the global financial crisis. Gunnlaugsson won the prime ministership in 2013 on a platform of taking a hard negotiating stance on Iceland's remaining creditors. This remains a major issue for him, so many people in Iceland see his wife's account as an incredible conflict of interest.

Iceland is uniquely sensitive to the fallout of the financial crisis, having been hit harder than many other countries. The largest protests in the country's history pressured Gunnlaugsson to resign, after he initially tried to survive the leak.

Why this was such a big deal in Iceland

To understand why people were so mad, you need to understand just how bad things had gotten in 2009.

In the early 2000s, Iceland had built up a massive financial industry fairly rapidly. It did so, however, on totally unsustainable bases — promising depositors high interest rates while at the same time spending a lot of money purchasing new assets. This was a bubble set to pop, and so it did in 2008 when the global financial system it depended on began falling apart.

The effect on Iceland was dramatic, as the Washington Post's Matt O'Brien explains:

Iceland's government couldn't afford to bail out its banks that had gotten so much bigger than its economy. The only choice was to let them go under. In other words, Iceland's banks were too-big-not-to-fail. That was a lot easier, though, when letting the banks fail meant letting foreigners lose their money. Iceland's government, you see, guaranteed its own people's deposits, but no one else's.

But now it was Iceland's government that needed a bailout. It needed the money to protect domestic deposits, cushion the economy's free fall, and keep their currency, the krona, from crashing much more. In all, Iceland got $4.6 billion, with $2.1 billion of that coming from the IMF and the other $2.5 billion from its Scandinavian neighbors.

This got really bad. The stock market lost 95 percent of its value; unemployment shot up from under 2 percent to over 8 percent.

The financial crisis was a disaster for Iceland, and one that made the public very wary of shady financial dealings. Finding out that the prime minister's family was holding on to huge secret cash reserves was bad enough. To make matters worse, Gunnlaugsson himself was involved in purchasing the shell company in 2007. He sold it to his wife for a pittance at the end of 2009, just one day before he would have had to disclose it due to his position in the country's government.

But the worst detail, by far, is Wintris' involvement in the Icelandic banking system. The shell company used by the prime minister's wife had actually invested in Iceland's banks before the financial crisis, and is currently claiming it's owed $4.2 million by the banks as a result. Gunnlaugsson had promised to deal with Iceland's remaining creditors after the collapse and international bailout; it turns out that his family was, in fact, one of the creditors. It essentially made his pledge to clean up the country seem totally incredible, leading to mass outrage — and, ultimately, his resignation.

"It touched a nerve because in the bank crisis in 2008, when the Icelandic banking system and really Icelandic society collapsed, Iceland was pretty close to being bankrupt," Haukur Holm, a reporter for Iceland's national broadcasting agency, told NPR.

"We haven't really emotionally recovered from the bank crisis, so when this came out on Sunday night, it really kicked us down again."

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