Shortly before Iceland’s politicians started plastering up posters for today’s general election, there was a spot of trouble in the capital. Riot police used a chain-saw and pepper spray to break up a group of squatters running an improvised cafe.

Not, admittedly, the stuff of revolution.There was no whiff of cordite - but it was a sure sign that Iceland is no longer Niceland.

The global crisis that has all but bankrupted the island is breaking up a cozy culture based on mutual solidarity, a society that sometimes seems more like an extended family than a nation state. Now there is a rawness about the place. And the politicians, discredited by their mismanagement of the crisis and bogged down by corruption, have to use the election to restore faith in an independent Iceland. It won’t be easy - and it may involve abandoning years of resistance to the European Union and the euro.

The raid just after Easter was on an old shuttered-up house reclaimed by the squatters in the middle of a ghost settlement. The area was supposed to be the Manhattan of Reykjavik: tall apartment blocks with state-of-the-art kitchens and big windows that looked out on the coastline.

The owners of the existing adjacent houses were strongly encouraged to live elsewhere so as not to dilute the exclusivity of this monied ghetto for the New Rich. Then the banks went broke, credit dried up, wealthy customers took flight and the old deserted houses, and the skeletal remains of the new apartments might as well be part of an archaelogical dig.

But the law had to be upheld so the students and slackers who had tried to breathe life back into the deserted buildings were chased away with the swish of a baton. Not perhaps an unusual sight elsewhere in Europe, but never before witnessed in Iceland.

Even the use of police tear gas to disperse demonstrators as they banged their pots and pans earlier this year was a break with the country’s live-and-let-live traditions. Only the anti-NATO protests in the stormy 1950s bore any comparison.

Little wonder that the atmosphere is brittle: unemployment has jumped from two to ten per cent in the past six months. Inflation is rocketing, over 15 per cent and moving unstoppably towards 20 per cent. Three companies are going bankrupt every day.

Many people are struggling to repay their inflation-linked mortgages to failed banks which are now owned by the state. The krona is melting. The young are migrating. The whole country is dreading graduation day: the moment when young Icelanders either join the dole queue or leave the island.

The interim government is led by a leftwing Social Democrat, Johanna Sigurdardottir, a former air stewardess, the first openly gay world leader, who has been nicknamed Saint Johanna by the Icelanders for her apparently unblemished incorruptability.

Her task, since the forced resignation of the Independent party-led government coalition in february, has been to restore international confidence in the island and to heal some of its internal rifts.

“Johanna surprised all of us,” says the novellist Hallgrimur Helgason who chronicled the aimless lives of young urban Icelanders in his book reykjavik 101. “She had a lot to do - the people here are really tired, they distrust the old system.”

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