Prime Minister Geir H. Haarde announced on 23 January 2009 that he would be stepping down as leader of the Independence Party for health reasons: he has been diagnosed as having a malignant oesophageal tumour. He said he would travel to the Netherlands around the end of January for treatment. Education Minister and Independence Party Vice-Chairman Þorgerður Katrín Gunnarsdóttir was to serve as Prime Minister in his absence. The leader of the Social Democratic Alliance, Foreign Minister Ingibjörg Sólrún Gísladóttir, was also unwell, undergoing treatment for a benign brain tumour since September 2008. The government recommended that elections be held on 9 May 2009.
Björgvin G. Sigurðsson, Iceland's Commerce Minister, resigned on 25 January, citing the pressures of the nation's economic collapse, as the country's political leaders failed to agree on how to lead country out of its financial crisis. One of his last acts as minister was to dismiss the director of the Financial Supervisory Authority (FSA). Björgvin acknowledged that Icelanders have lost faith in their government and political system. "I want to shoulder my part of the responsibility for that," he said.
Negotiations on continuing the coalition broke down the next day, apparently over demands from the Social Democratic Alliance to take over the leadership of the government, and Geir Haarde tendered the government's resignation to the President of Iceland, Ólafur Ragnar Grímsson. The President asked the present government to continue until a new government can be formed, and held talks with the five political parties represented in the Althing.
After these discussions, Ingibjörg Sólrún Gísladóttir of the Social Democratic Alliance and Steingrímur J. Sigfússon of the Left-Green Movement were asked by the President to negotiate the formation of a new coalition government. Such a coalition would be five seats short of an overall majority in the Althing, but the Progressive Party (seven seats) was expected to support the coalition without actually joining the government. Neither party leader became Prime Minister: instead, the position went to Jóhanna Sigurðardóttir of the Social Democratic Alliance, then the Minister of Social Affairs and Social Security, who became the new chairwoman of her party on 28 March 2009.
On 8 April 2009, former Prime Minister Geir H. Haarde stated that he was solely responsible for accepting controversial donations to the Icelandic Independence Party in 2006, ISK 30 million from the investment group FL Group, and ISK 25 million from Landsbanki.
Geir was strongly criticized in the April 2010 report of the Special Investigative Commission into the financial collapse, being accused of "negligence" along with three other ministers of his government. Iceland's parliament voted 33–30 to indict Geir, but not the other ministers, on charges of negligence in office at a session on 28 September 2010. He will stand trial before the Landsdómur, a special court to hear cases alleging misconduct in government office: it will be the first time the Landsdómur has convened since it was established in the 1905 Constitution. The trial began in Reykjavik on 5 March 2012. Geir Haarde was found guilty on one of four charges on 23 April 2012, for not holding cabinet meetings on important state matters. Landsdómur said Mr. Haarde would face no punishment, as this was a minor offence.
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