Iceland's Government Collapse a Sign of More Bad Times Ahead

News Analysis: If shockwaves from the global financial crisis are still being felt around the world, then the isolated, tiny island nation of Iceland is ground zero.

This week, outgoing center right Prime Minister Geir Haarde tendered his resignation following weeks of regular protests by Iceland citizens angry about the government's inability to handle the country's economic troubles. Protests that resulted in a violent clash with police for the first time in Iceland since 1949.

Haarde will now likely be replaced by a center left politician.

What's significant is that for the first time a national government has collapsed due to the economic crisis. What's surprising is that it happened in usually low-key Iceland.

But then again, Iceland has been the scene of a lot of "first's" during this economic crisis. It has been called a "leading indicator" of what was to come in this financial maelstrom, a sort of "canary in the coal mine" of our economic woes.

It took on this role because Iceland's banks were overleveraged with more debt than others as it kept bankrolling entrepreneurs going on a buying spree abroad. Banks which, when the chips started to be called in and the subprime market froze up, were more vulnerable than most. This was compounded by the fact that Iceland is a tiny country which doesn't have the financial resources to bail the banks out.

If you look at the history of Iceland's troubles recently its always a bit ahead of the U.S. and other European countries on many points: the banks failed and got nationalized earlier; the stock market crashed earlier and harder; and now the unemployment numbers are soaring higher across the board. They even protested before anyone else did, which resulted in a whole new government.

That's why, once again, Iceland holds a lot of prominence as a bellwether. Experts FOX News talked to say this country is not the only which will "kick the rascals" out over the financial crisis, but is the first. They particularly note young democracies on the periphery of Europe, such as Bulgaria and the Baltic countries, have also seen violent protests recently related to the economy.

And even more mainstream European nations like Greece have been hit with unrest. Looking at weak economies and soaring unemployment rolls, experts say that in countries like Italy and Spain protests can't be far behind.

The parallels are now being drawn not just with the nasty protests in Europe of 1968, but -- much more tellingly -- to the demonstrations that broke out following the Wall Street Crash in October 1929, when the Great Depression spread throughout the western world.

Today, populists politicians are beginning to gain favor in this tumultuous period, and that is not necessarily a good thing for the countries involved, or for U.S. relations.

Case in point is Iceland, once again. The most favored political party right now in Iceland is the Left-Green's, which will be a principal member of the interim coalition government here. It doesn't full support possible European Union membership for Iceland, but more significantly for the US, it would like to pull Iceland out of NATO.

Iceland was a founding member of North Atlantic Alliance. Due to its utterly strategic location just under the Arctic Circle it played a crucial role for the U.S. during the Cold War. There was a U.S. air base on the island up until 2006. It is no coincidence that former President Reagan knocked heads together here with his Soviet counterpart. The image Wednesday of a NATO flag being burned by protestors in front of a meeting held by the Alliance cannot be too pleasing to the U.S.

All of sudden this global financial crisis looks like it could spread, not just in geographical and monetary terms, but in substance as well. And just as the experts can't define when the downward spiral of financial woes will stop, they also can't say how severe the political collateral damage will be. But many predict that there may be more dangerous days ahead.

Greg Palkot is FOX News' foreign correspondent reporting from Iceland's capital, Reykjavík.