Image: Geir Haarde
Brynjar Gauti  /  AP
Iceland's former Prime Minister Geir Haarde, seen here on Jan. 26, 2009, has been referred to a special court in a move that could make him the first world leader to be charged in connection with the global financial crisis.
updated 9/28/2010 7:20:28 PM ET 2010-09-28T23:20:28

Iceland's former Prime Minister Geir Haarde has been referred to a special court in a move that could make him the first world leader to be charged in connection with the global financial crisis.

After a heated debate Tuesday, lawmakers voted 33-30 to refer charges to the court against Haarde for allegedly failing to prevent Iceland's 2008 financial crash — a crisis that sparked protests, toppled the government and brought the economy to a standstill by collapsing its currency.

Haarde faces up to two years in jail if found guilty. The court, which could dismiss the charges, has never before convened in Iceland's history. A hearing date has not yet been set.

Haarde, ex-leader of the Independence Party, is no longer in parliament and stepped down from office last year following widespread protests and treatment for esophageal cancer.

"I will answer all charges before the court and I will be vindicated." Haarde, 59, told the Icelandic Broadcaster RUV. "I have a clean slate. This charge borders on political persecution."

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Iceland, a volcanic island with a population of just 320,000, went from economic wunderkind to fiscal basket case almost overnight when the credit crunch took hold.

After dizzying economic growth that saw banks and companies in this tiny Nordic nation snap up assets around the world for a decade, the global financial crisis wreaked political and economic havoc in Iceland. Its banks collapsed in October 2008.

Unemployment has soared since then and the country has lurched from crisis to crisis.

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In April, an eruption at Iceland's Eyjafjallajokull volcano triggered a giant ash cloud that disrupted global air travel for weeks and later restricted travel to and from the island nation.

In the same month, a report into the banking collapse accused Haarde and the central bank chief of acting with "gross negligence" in allowing the financial sector to overheat without adequate oversight.

The 2,300-page government-commissioned report detailed a litany of mistakes made in the lead-up to the bank meltdown.

Pall Hreinsson, the supreme court judge appointed to head the Special Investigation Commission that issued the report, singled out seven former officials including Haarde and central bank chief David Oddsson for particular criticism.

No other officials besides Haarde were referred for prosecution to the court on Tuesday. Lawmakers decided Tuesday not to charge three other former ministers, which angered some who felt the blame extended beyond Haarde.

"You could say that all of the four former ministers should have been charged or none at all," says Thorkell Sigvaldason, 35, a university student. "But on the other hand, Geir Haarde was the leader and sometimes they have to pay for the mistakes of their men."

Teacher Bragi Johannnsson, 41, agreed that all four should face charges. He said the laws are too lenient and must be toughened.

"I think there is a need for reform on the laws on politicians," he said.

Haarde has blamed the banks in the past, and said he felt government officials and regulatory authorities tried their best to prevent the crisis.

The report found that the country's three leading banks — Glitnir, Kaupthing and Landsbanki — got too big and overwhelmed the financial system when they ran into trouble with excessive risk-taking.

By the time the banks dropped in a domino-like sequence within a week of one another in October 2008, the banking sector had grown to dwarf the rest of the economy by around nine times.

In one major blunder detailed in the report, staff at the Icelandic central bank forgot to extend a $500 million loan agreement, reached in March 2008, with the Bank of International Settlements in Basel, Switzerland. A belated attempt to receive an extension was not granted by the international bank.

The report said that it was a key error at a time when few things were more important than building up Iceland's foreign currency reserves.

The central bank then turned to the Bank of England in April 2008, seeking a currency swap agreement. Mervyn King, the British central bank's governor, refused, but offered to help Iceland to reduce the size and burden of its banking sector. Iceland rejected the offer at the time.

Before Haarde was prime minister, he also held the posts of finance minister and foreign minister.

The special court will consist of 15 members — five supreme court justices, a district court president, a constitutional law professor and eight people chosen by parliament every six years.

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