The explosive revelations in the Panama Papers have led the Icelandic prime minister Sigmundur Davíð Gunnlaugsson to step down, while still staying on as leader of the Progressive party. They show that he and his wife did not disclose millions of euros in the British Virgin Islands, while the ordinary public struggled through the severity of the financial crisis. This provoked by far the largest public protests in Iceland’s history. Yesterday 22,000 people – a staggering 10th of the electorate – demonstrated in front of the parliament building in Reykjavik, calling for him to resign. The atmosphere in the country is close now to that of early 2009, when the coalition government at the time was ousted – an event later referred to as Iceland’s “pots and pans revolution”.

This time, the discontent may prove to be even stronger. After more than seven years of severe austerity and hardship rebuilding the collapsed economy, Icelanders are faced with the revelation that many of those who sought leadership post-crisis had money stashed in offshore accounts, while the tax burden domestically was hiked to the very limit of what ordinary people could tolerate.

Gunnlaugsson's sudden rise to the top did not humble him

It took many by surprise how prominently Iceland featured in the Panama Papers. Compared to the size of this tiny country our nationals are hugely over-represented. Many other politicians here are named in the Panama Papers.

Once again Icelanders are faced with a political crisis. In the wake of Sigmundsson’s resignation the coalition government hangs by an ever-thinning thread – and risks imminent collapse if its leaders cannot placate the angered public.

Initially Gunnlaugsson fiercely refused to resign. Meanwhile, both the Independence party leader, finance minister Bjarni Benediktsson and the president of Iceland, Ólafur Ragnar Grímsson, cut short their trips abroad and landed in Reykjavik on Tuesday morning. Scheduled regular meetings of both parliament and the government were cancelled while the coalition leaders met in secret at an undisclosed location in the Reykjavik area.

Facebook Twitter Pinterest Sigmundur Gunnlaugsson in Edmonton, Canada. Photograph: Canadian Press/Rex Features

Responding to the lack of support from his coalition partners, Gunnlaugsson threatened to dissolve parliament and call a snap election, which our constitution says would have to be held within 45 days. His move was however refused – at least temporarily – by the president. This led to the prime minister’s resignation. We have reached full crisis mode, and the outcome is uncertain.

Gunnlaugsson’s rise to power in the wake of the financial crisis was a sharp one. He first made his name in Iceland as a TV reporter at the state broadcaster, though his star rose with his involvement in the so-called InDefence movement, which fought foreign creditors’ attempts to make Iceland pay out £2.3bn in compensation to the UK and the Netherlands over the collapse of the Icesave bank. This was the most serious diplomatic crisis the country had ever fought and Gunnlaugsson was at the forefront of it.

Gunnlaugsson’s father had belonged to the formerly agrarian Progressive party, which in wake of the crisis was in tatters. Without ever having been active in politics before, the young Gunnlaugsson was whisked to its helm at a snap party conference during the height of the crisis. Under his leadership the party became more nationalistic and populist, and grabbed a staggering quarter of the vote in the 2013 election. Thus, while still a novice in politics, Gunnlaugsson suddenly found himself in the office of prime minister, in a coalition with Iceland’s former hegemonic power, the Independence party.

This sudden rise to the top did not humble young Gunnlaugsson, who developed an aggressive and at times outright arrogant style of leadership.

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In the classical style of contemporary European populists, he claimed to speak on behalf of the deprived ordinary man against the wealthy elite – while belonging himself to the world’s richest 1%. In this guise he led the fight against the creditors of the fallen banks and was instrumental in the deal that was struck.

Now that the Panama Papers have exposed that his wife was one of the foreign creditors of the fallen banks, through a firm registered on Tortola in the British Virgin Islands, which held his wife’s inheritance, many Icelanders feel betrayed.

People are angry that Gunnlaugsson was in effect sitting on both sides of the table and even his old friends in the InDefence movement have abandoned him. InDefence founder Ólafur Elíasson was one of the many who called for Gunnlaugsson’s resignation, voicing disappointment as to how lenient his government proved to be in its negotiations with the creditors of the three fallen Icelandic banks.

Whatever the outcome, this – as so many before – is a serious day in Icelandic politics. This week Icelanders are being portrayed in the global press as one of the main villains in this global off-shore crisis. This puts pressure on all our politicians – to clear the air, to take the necessary measures to heal the country’s hurt, and to reclaim our lost reputation.