Category: Wikileaks Upplýsingar

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E.O. 12958: DECL: 04/02/2016
TAGS: PGOV PREL MARR PINR IC
SUBJECT: ICELAND: COAST GUARD DIRECTOR SHUT OUT OF
POST-NASKEF PLANNING

REF: REYKJAVIK 118

Classified By: AMBASSADOR CAROL VAN VOORST, REASONS 1.4 (B AND D).

¶1. (C) Summary: In informal conversation 3/31 Icelandic
Ministry of Justice Deputy Permanent Secretary disclosed to
Embassy that Coast Guard Director Georg Larusson has lost the
confidence of Minister of Justice Bjarnason because he is not
seen as a team player. This explains why decisions about
search and rescue (SAR) provisions to follow on from the
planned departure of the 56th RQS from Naval Air Station
Keflavik (NASKEF) are being handled in Bjarnason’s private
office, which has hired a consultant to vet helicopter sales
offers, with the ICG largely cut out of the action. Embassy
advises U.S. officials for now to work directly with
Icelandic Justice Ministry officials on Coast Guard issues as
Larusson’s tenure appears increasingly troubled. End summary.

¶2. (C) On the margins of the March 31 bilateral defense talks
(reftel), poloff discussed with Iceland Ministry of Justice
and Ecclesiastical Affairs Deputy Permanent Secretary Stefan
Eiriksson (strictly protect) the ministry’s planning for
near-term replacement of the SAR assets Iceland will lose
when the 56th RQS departs Iceland shortly as part of NASKEF
downsizing.. Eiriksson, a 36-year-old lawyer, is also his
ministry’s head of police and judicial affairs, in which role
he has oversight of the Iceland Coast Guard (ICG). Poloff
inquired into how Eiriksson’s boss, Justice Minister Bjorn
Bjarnason, has given him only until Easter to come up with an
interim plan. Asked if he was working all hours or felt he
had things under control, Eiriksson answered, „A bit of
both.“ He explained that the Ministry had contracted for the
services of a 72-year-old former Icelandair Director of
Operations and Chairman of the Association of European
Airlines Committee on Technology and Operations, engineer
Leifur Magnusson, to evaluate the sales offers that have been
pouring into the Ministry from helicopter manufacturers
(note: including Sikorsky; end note). Magnusson contributed
much-needed technical expertise to Ministry deliberations.

¶3. (C) Poloff asked why the decision-making on SAR assets was
being handled in this way by Ministry principals rather than
delegated to the presumed subject-matter experts at the ICG.
Eiriksson confided that Bjarnason is fed up with leaks and
public complaints from the ICG and is tempted to privatize
some of its functions. Icelandic law enforcement functions
that have been partially privatized, such as the call center
service on the country’s 112 (equivalent to U.S. 911) line,
have worked well, Eiriksson observed. The contractors seem
happy to have the work and get on with their job without any
whining. In contrast, ICG officials are frequently heard in
the press complaining that they do not have enough resources
properly to carry out their responsibilities — thus creating
a public relations headache for the Minister.

¶4. (C) Poloff then asked why, indeed, the ICG found itself in
the position of making public pleas for greater funding. ICG
Director Larusson, in the job since January 2005 following a
successful stint as Immigration Director (also under the
Justice Ministry) was believed to be Bjarnason’s personal
pick for his job, as someone who understood 21st-century
security challenges and shared Bjarnason’s hard line on law
enforcement. Eiriksson offered that Larusson’s management of
the ICG has been somewhat of a disappointment. Unlike the
National Commissioner of Police (NCP), for example, Larusson
has not been willing to make tough choices about where to use
the resources he has been given. Larusson will get more
resources when he has demonstrated the capacity effectively
to husband what he has — and not before, Eiriksson declared.

¶5. (C) Comment: While the motivation for Eiriksson’s
surprising candor is unclear, the accuracy of what he said
appears to be supported by recent observations of Larusson
and his top policy deputy, Commander Asgrimur Asgrimsson
(note: a U.S. Coast Guard Academy graduate; end note). At a
meeting with U.S. Coast Guard Commandant Thomas Collins March
28 that Eiriksson also attended, Larusson seemed unusually
taciturn and distracted. Asgrimsson pointedly asked Collins
whether the USCG saw any advantage in privatizing some rescue
services and visibly welcomed the Commandant’s answer that he
did not. He afterwards complained to poloff that the people
making decisions for the ICG these days were not consulting
with the professionals there, resulting in lowered morale at
the organization. Under the circumstances, potential U.S.
interlocutors may be wise to route their proposals for ICG
reforms through Eiriksson, whose political star seems to be

on the rise — or at least not imploding. End comment.
van Voorst

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E.O. 12958: DECL: 12/07/2019
TAGS: ECON EFIN IC PGOV PREL
SUBJECT: IMF: ICELAND NEEDS FINANCIAL AUSTERITY

REF: A. STATE 190
¶B. STATE 176

Classified By: CDA SAM WATSON FOR REASONS 1.4 (B) AND (D)

¶1. (C) Summary. Mark Flanagan, leader of the IMF review team
here in Reykjavik, believes Iceland’s recovery could start in
mid-2010, but he cautioned that that the government must take
several critical steps to lay the necessary groundwork,
including significant fiscal austerity. Prior to the next
IMF review, said Flanagan, Iceland must: 1) complete the 2010
budget and medium-term fiscal strategy; 2) develop a public
debt management strategy; 3) recapitalize the banks; and, 4)
reform/ strengthen supervisory authority. Despite the
popular attention focused on Icesave, the budget deficit and
recapitalizing the Central Bank and the private sector banks
are the most important factors in Iceland’s growing debt
burden. Flanagan appeared confident that Icelandic
authorities understand what they need to do. Whether they
and the coalition in parliament can muster the political will
to do so remains an open question. End Summary.

¶2. (C) On December 7, Charge and Econoff discussed Iceland’s
progress on its IMF program with Mark Flanagan, leader of the
IMF team here on a two week visit to Reykjavik. Although
Flanagan believes Iceland’s recovery could start in mid-2010,
he cautioned that that the government must take several
critical steps to lay the necessary groundwork as well as
undertake significant fiscal austerity measures. Prior to
the next IMF review, said Flanagan, Iceland must: 1) complete
the 2010 budget and medium-term fiscal strategy; 2) develop a
public debt management strategy; 3) recapitalize the banks;
and, 4) reform/ strengthen supervisory authority. These
steps are the keys to a successful recovery. As for the
current economic situation, Flanagan said that there had been
limited decline in output as a result of fiscal stimulus and
that recovery to positive economic growth could come by the
third quarter. By the end of 2010, he forecast that
inflation would be about four percent. For interest rate
policy to be effective, Iceland should enforce capital
controls more strictly.

¶3. (C) Managing public and private sector debt would be a key
challenge for Iceland, Flanagan noted. A significant portion
of Iceland’s public sector debt will roll over in the next
three years, he said, causing the country’s net debt to rise
by 14 percent of GDP. Consequently, fiscal consolidation is
critical. The Ministry of Finance should have responsibility
for debt management, but the Ministry eliminated its debt
management office several years ago when Iceland ran a
surplus and has no official dedicated to work on the issue at
present. The IMF is already providing technical assistance
in this area.

¶4. (C) Flanagan stressed the need to address insolvency in
the private sector lest the private sector stand in the way
of public sector fiscal consolidation. He estimated that
half of all corporations need restructuring and a quarter of
all corporations are or will be insolvent. Corporate
restructuring is difficult and will take time. A key
constraint in Iceland is the small size of the court system,
where 48 judges to handle all cases, criminal and civil.
Flanagan called for Iceland to look at ways to facilitate
debt restructuring outside of the courts to avoid
overburdening the judicial system.

¶5. (C) Flanagan remarked several times that the country’s
overall debt level, not the Icesave debt, is the largest
problem that Iceland faces. Three larger contributors than
Icesave to the overall debt, he said, are the deficit
(projected to be 14 percent in 2009), the Central Bank’s huge
liquidity losses suffered immediately after the collapse, and
recapitalizing the banks. To illustrate this point, Flanagan
noted that about 20 percent of GDP would be needed to
recapitalize the Central Bank’s liquidity losses, while the
Icesave debt is expected to add 10 to 15 percent of GDP to
the debt load in 2016. He also stated that Iceland’s
problems stem, in part, from the fact the country has a
tax-rich structure that is suffering from a sharp decline in
tax revenue, for which a structural adjustment of 10 percent
of GDP is necessary. Despite these larger issues, Icesave
has played a significant role in the delay of Iceland’s
economic recovery, and people have been easily distracted by
„silver bullet“ ideas such as adopting the Euro. Icesave did
not, however, delay the IMF’s last review of the program,
Flanagan noted, because the policy content for the review was
not ready until early August.

REYKJAVIK 00000218 002 OF 002

¶6. (C) The IMF believes that Iceland’s political leadership
understands both the gravity of the situation and the
requisite steps to put the economy back on track. Flanagan
said that a deal to recapitalize Landsbanki bank, an IMF
requirement, should be reached soon. The political
bottlenecks due to Iceland’s small size, however, mean
progress will occur at a slower pace. (Note: the Ministry of
Finance, for example, only has 75 employees. End note.)
When asked about the future of the IMF program if parliament
were to reject the Icesave bill, Flanagan stated that, in
theory, the IMF could adjust the program, but that it would
require significant reworking. The IMF would like to
continue with the current program and, as the financing from
the Nordics is essential to the current program, he is
hopeful that parliament will pass the Icesave bill and
receive access to the Nordic loan.

¶7. (C) The IMF expects to reach agreement with the Government
of Iceland on the policy content for the next review by the
time Flanagan departs next week. The next review could take
place as early as late December or early to mid January.

¶8. (C) Comment: Flanagan seemed confident that Icelandic
authorities understand what they need to do. Whether they
and the coalition in parliament can muster the political will
to do so remains an open question. End Comment.
WATSON

http://wikileaks.is/cable/2009/12/09REYKJAVIK218.html

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E.O. 12958: DECL: 07/28/2019
TAGS: PGOV PREL PINR EUN IC
SUBJECT: ICELAND ON ICESAVE: „WE ARE WILLING TO PAY“

Classified by: CDA Neil Klopfenstein for reasons 1.4 (b) and (d)

¶1. (C) SUMMARY: Multiple GOI sources privately expressed the
government’s intention to guarantee the Icesave deposits held by
foreign depositors in the UK and the Netherlands. In addition, the
Foreign Minister told the UK Ambassador that he expects the Althingi
to approve the controversial guarantee agreement when it reconvenes
next week. The UK Ambassador also reiterated that neither the UK,
nor the Netherlands, is linking the Icesave issue to Iceland’s EU
accession. END SUMMARY.

Iceland intends to pay for Icesave
———-
¶2. (C) An aide to former Foreign Minister Ingibjorg Solrun
Gisladottir who is currently working behind the scenes for the Social
Democratic Alliance approached CDA and stressed Iceland’s intention
to reimburse the losses of individuals who held Icesave accounts in
the United Kingdom and the Netherlands. „We are willing to pay,“ she
said. The aide explained that the current debate in the Althingi is
about the specific terms of the loan, not about whether or not the
depositors should be paid. If the terms of the loan can be agreed
upon in the Foreign Affairs Committee, then the bill should pass.

¶3. (C) The UK Ambassador informed EmbOffs that he received the same
information from the current Foreign Minister, Ossur Skarphedinsson,
in a meeting Friday afternoon. Sharphedinsson explained that the
current delay in the Althingi is not about whether to cover the
deposits but rather over desired clarifications in the treaty. The
two main sticking points, said Skarphedinsson, are clarifications
that in the event of a default: 1) the British and Dutch governments
will not take possession of Icelandic government-owned assets abroad
and 2) Iceland’s natural resources will not be used as collateral.
The UK Ambassador told EmbOffs that the UK and the Dutch will not
oppose such addendums. It is likely, according to the British
Ambassador, that the two addendums will be added to the agreement
next week when the Althingi reconvenes. Skarphedinsson said that he
believes these additions will be sufficient to sway opinion on the
bill and allow all sides to claim victory. It is Skarphedinsson’s
hope that the bill will pass as soon as next week.

¶4. (C) Yet another sticking point, however, may also be a clause in
the agreement regarding Iceland’s ability to renegotiate the terms
should its debt burden exceed the amount in its depository insurance
fund when Iceland must begin repaying the loan. (Note: Iceland will
be given a seven year grace period before it must start repaying the
loan. End note.) A member of the Civic Movement told EmbOff that
the opposition parties believe this clause is too weak and must be
strengthened.

¶5. (C) Skarphedinsson told the UK Ambassador that Prime Minister
Johanna Sigurdardottir is losing patience with the delays and has
told members of the Left Green Movement (LGM) within the ruling
coalition to support the agreement by next Thursday or she will
resign, causing the government to disband. This is a sizeable threat
that could hit home with several sitting members of the LGM who would
be unlikely to be reelected to parliament in a new election.
Skarphedinsson believes that the Prime Minister’s ultimatum to the
Left Green Party, in combination with the addendums, will provide the
needed votes to pass the agreement by a narrow margin.

UK won’t renegotiate Icesave agreement
———-
¶6. (C) The UK Ambassador firmly stated that the UK will not
renegotiate the Icesave agreement, despite calls from a small number
of GOI officials to do so. From the UK’s perspective, it holds all
of the cards and is under no pressure to renegotiate the current
settlement. It considers the Icesave loan to be like a mortgage
agreement in which the borrower (Iceland) has no collateral and a
poor credit rating, making it a more risky investment for the UK. In
response to one critique that the interest rate on the loan is too
high and that the UK and Netherlands are profiting from the
arrangement, the UK Ambassador said that the GOUK is charging only
what it is costing them to raise the money, plus administrative
costs.

The LGM: Supporting Icesave to stay in power
———-
¶7. (C) The LGM, the minority member of the ruling coalition, has lost
significant political capital in voting to apply for EU membership
and could lose more support by approving the Icesave agreement. The
UK Ambassador posited that Steingrimur Sigfusson, Minister of Finance
and head of the LGM, continues to support the ruling coalition’s
Social Democratic Alliance agenda because he realizes that this is
the only way for his political party to remain in power. This is the
only means the LGM has to continue to play a key role in building a
new Iceland, one that replaces cronyism with transparency. In the

REYKJAVIK 00000131 002 OF 002

meantime, the LGM can claim influence and victory based on the fact
that the state has resumed a larger ownership role in key economic
sectors than it had prior to the financial collapse, which is one of
the LGM’s main platform items.

Comment
———-
¶8. (C) Despite conflicting reports in the media, the key players in
the Icesave agreement, namely the GOI and the GOUK, are cautiously
optimistic that the issue will be resolved in the next few weeks.
Media coverage is beginning to reflect this shift through recent
reporting that highlights the Icesave agreement as a decent deal
compared to the other loans Iceland is receiving, including the IMF
loan. All parties appear to agree that Iceland must guarantee the
Icesave deposits for the minimum amount. While attempts have been
made to link the recent EU accession talks to resolving the Icesave
issue, the UK Ambassador and others have continued to reiterate the
need to de-link the issues. Both sides believe that the two
addendums covering the concerns of Icelandic assets abroad and use of
natural resources should stifle the loudest detractors of the Icesave
bill into supporting the ruling coalition government. If the
Icesave bill is finally passed, it should be considered a resounding
victory for the ruling coalition, as well as for the former Icesave
account holders, paving a slightly smoother path towards restoring
Iceland’s international reputation.
KLOPFENSTEIN

http://wikileaks.is/cable/2009/07/09REYKJAVIK131.html

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E.O. 12958: DECL: 06/04/2019
TAGS: EFIN ECON PREL IC
SUBJECT: Iceland: Tough Times Ahead: Minister of Finance Paints
Somber Picture

Classified By: CDA Neil Klopfenstein for reasons 1.4 (b) and (d).

¶1. (C) Summary: Iceland Minister of Finance Steingrimur J. Sigfusson
predicted difficult times for Iceland in the year ahead at a June 3
meeting with the CDA. Sigfusson promised significant tax hikes and
budget cuts, with much of the pain to come in the fall. Negotiations
with labor and capital to map out a consensual road ahead have been
unusually calm and understanding, particularly with often contentious
government unions. He noted that agreements on loans from the Nordic
countries and Poland are nearly finalized, but that promised support
from Russia is not nailed down. Sigfusson was confident that a
mid-July review by the IMF would go well. The Minister noted the
government’s delicate balancing act regarding interest rate levels.
He said that the „bleeding“ Icelandic business sector and
considerable public clamor to relieve the debt burden of Icelandic
consumers argue for lowering rates. On the other hand, he is well
aware of the IMF’s concerns that quick and drastic reductions in
rates could erode efforts to stabilize the kronur. Sigfusson confided
that talks are underway again to resolve the Icesave accounts issue.
He said the „UK is sending mixed messages,“ while talks with the
Dutch are going better. Although not a supporter of joining the EU
himself, Sigfusson believes the Parliament will agree to begin
membership negotiations in the next few weeks. He believes that vote
will be close, and that a „no“ vote would bring down the current
government. End Summary

¶2. (C) On June 3, at the Embassy’s first meeting with Minister of
Finance Steingrimur Sigfusson since Iceland’s April 25th elections,
the Minister described the government’s May 28th sin tax hikes on
alcohol, tobacco, and gasoline as „the first of many cold showers.“
He said the taxes were raised without notice because of rumors that
such an action was imminent and because it was a necessary measure
that the government could take in the middle of the financial year
without Parliamentary approval. Sigfusson said more unpopular
announcements will come in the next week and that there will be a
huge effort to raise revenues and cut expenditures before the start
of the next fiscal year. These plans will be debated in the next
Parliament, which opens in October.

¶3. (C) The government is trying to build a consensus for drastic
actions by negotiating with key social partners (business, government
unions, and private sector unions and associations). Sigfusson said
these discussions have proceeded with unusual calm and understanding.
He noted that this was particularly the case with the government
employee unions, which have been traditionally contentious
negotiators. The unions are intent on saving jobs and are willing to
forego wage increases for two years to do so. The Minister said that
some private sector unions, particularly outside of Reykjavik, have
been reluctant to compromise on wage increases.

¶4. (C) Minister Sigfusson was upbeat about the IMF loan package. He
said he expected a mid-July IMF review, which he thought would go
well. Sigfusson shared that all was on track with the loans from the
Nordic countries, which he suggested would be finalized soon. He was
delighted that the Poles were likely to provide the full $250 million
that they had pledged last fall. They will be given a copy of the
Nordic paper work as a model(„with the interest rate whited out“).
The Russian commitment of $500 million is less certain, but
negotiations continue. A meeting with a high level Russian Treasury
official is scheduled soon. Sigfusson admitted that if the Russian
funds fall through, Iceland will be facing a gaping hole in their
package. If this happens, he indicated they would go knocking on
other doors, including Canada, the United States, other European
countries, and perhaps China.

¶5. (C) The CDA raised U.S. Treasury Department concerns about the
Iceland Central Bank’s recent steep interest rate cuts. Sigfusson
noted that the government is feeling real political heat to lower
rates. He said, „The business community is bleeding.“ Lower rates
are particularly important to revive the profitability of the banking
sector, he said, which needs to reduce the gap between what they pay
depositors and what they earn on their foreign loans. Sigfusson is
very aware of the capital flight risks of lower rates, but feels that
current controls to keep capital in the country are working
effectively. The Minister said that he thought the risk posed by
lower rates was worth it to preserve suffering Icelandic businesses
(and the jobs they provide). He said that in the end that neither
side would be happy. (Comment: The Central Bank announced a rate
cut of 1 percent on Thursday, well below the 6% cut that some
advocated). When asked about whether the government was exerting more
control over the Central Bank, Sigfusson said that they have no real
influence, but do exchange a lot of information.

¶6. (C) Regarding the Icesave negotiations, Sigfusson confided that
„secret“ talks are underway. He said, „We will announce the talks if
progress is made.“ (Comment: A local daily carried a story on the
talks in today’s paper.) Sigfusson reiterated that the Government of
Iceland will live up to its obligation to reimburse Icesave
depositors for their losses, as required by EU regulations. However,
he said the reimbursement scheme considered by the previous

REYKJAVIK 00000101 002 OF 002

government last year (in which Iceland would take loans from the U.K.
and Holland for the full amount of the deposit guarantees it owes)
was not tenable. In its place, the government envisions a new payback
plan: the assets of the banks would be liquidated over the next
several years (Sigfusson said it could take up to seven years) and
the returns from the assets would be turned over to the UK and Dutch
governments to pay back Iceland’s debt. Sigfusson estimated that
these assets could cover up to 75% of the Iceland government’s debt
to the U.K. and the Netherlands. The remaining debt would be paid
back by a loan with terms to be determined after the final obligation
is known. The advantage of this plan, according to Sigfusson, is
that Iceland would not be saddled with a huge loan on its books,
which would affect the country’s financial ratings.

¶7. (C) Sigfusson admitted that the Netherlands is more open to this
plan than are the British. He said the Dutch understand that there
were faults with the EFTA deposit insurance system and are
sympathetic to the hard situation in Iceland. On the other hand,
Sigfusson stated, „The UK government is sending mixed messages, and
have delayed a few meetings.“ He speculated that local British
politics, as well as the instigation of Anti-Terrorism legislation
and the loss of charity organization deposits, also contribute to
British reluctance to endorse the plan.

¶8. (C) Sigfusson is clearly aware that the Icesave negotiations will
not likely be resolved before the anticipated IMF review in July. In
discussions with IMF representative Mark Flanagan last week, the
Minister asked Flanagan if Iceland could proceed with the review if
everything else was in order except an agreement with the British.
Flanagan said Iceland had a right to ask for the review to proceed.
Sigfusson indicated that Iceland would ask other IMF Executive
Committee board members to prevent a UK block of the review, should
the British seek to stop it.

¶9. (C) The Minister predicts that the Parliament will approve a
resolution to begin negotiations to join the European Union before
its summer recess. The vote will be close, as some of the opposition
parties are milking the decision for political gain. He says the
Social Democratic Alliance (SDA) Party has much riding on this vote,
and that should it fail, the SDA/Left-Green coalition government
would likely fall. Sigfusson, himself skeptical of EU membership,
fears that many, especially in the SDA, see the EU as a panacea for
all of Iceland’s ills. He says, „Our priority should be fixing things
here and now. The benefits of EU membership are at least a decade
away.“

¶10. (C) Comment: To the surprise of some, Sigfusson is proving to
be a serious and responsible Minister of Finance. Although many in
his Left-Green Party have been suspicious of the IMF loan from the
start, the Minister has acknowledged to Emboffs on several occasions
the importance of the IMF package and his commitment to ensure its
success. Sigfusson has resisted (probably while gritting his teeth)
most temptations to outright blame the current crisis on the excesses
of capitalism. He does not hesitate, however, to take an occasional
swipe at the rightist opposition and remind voters that Iceland’s
present economic mess is not of his doing. We are somewhat skeptical
of the Minister’s read out on the status of the Icesave negotiations.
The British Ambassador painted a much bleaker picture in
conversations with Emboffs a fortnight ago, saying the Icelanders
have not been serious about addressing the issue, and that they were
offering up naive „hair-brained“ schemes of little substance to pay
back the British loans.

KLOPFENSTEIN

http://wikileaks.is/cable/2009/06/09REYKJAVIK101.html

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E.O. 12958: N/A
TAGS: PGOV PREL PINR IC
SUBJECT: ICELAND: THE PROGRESSIVE PARTY — AN OVERVIEW

¶1. (U) Summary: The traditionally agrarian Progressive Party is
looking to the 2009 elections as a chance to reclaim lost glory and
its historical role as the deciding factor in governing coalitions
on both ends of the political spectrum. The party — Iceland’s
second-largest for most of the last century — suffered mightily at
the polls in 2006 and 2007 from perceptions of cronyism and
corruption. Support has decreased still further since then despite
attempts to modernize the party, which seem to have widened internal
disputes rather than overcome them. Four chairmen in three years
have not managed to bring the disagreements to a close, but many are
hopeful that a new young chairman can finally unify the party. The
party is pro-NATO and until recently was against, or at best
ambivalent towards, the EU, but has shifted more to a pro-EU
platform in the last few months. The PP is currently defending the
Social Democratic Alliance/Left-Green Movement minority coalition
and claims to prefer a leftist government after the upcoming
parliamentary elections. End Summary.

¶2. (SBU) The Progressive Party (PP) was established in 1916. For
most of the twentieth century it was the second largest party in
Iceland, but its poll numbers have slipped in recent years. The
constituency is largely rural and agrarian, closely connected with
the cooperative movement in Iceland. The PP has frequently played a
kingmaker role, given the inability of any one party to win an
outright majority on its own. Icelanders describe the party as „open
at both ends“ because of its ability to form coalitions on both the
left and right of the political spectrum.

¶3. (SBU) Former party leader Halldor Asgrimsson (1994-2006), who
was Prime Minister in the IP-PP coalition from 2004-2006, attempted
to modernize the party and increase its appeal to urban voters, but
he proved mostly unsuccessful in this endeavor. Asgrimsson stepped
down as chairman of the party after the municipal elections in May
2006 when the PP suffered its second-worst electoral outcome ever.
The party was also embroiled in discord between the rural and
agrarian component of the party — led by Deputy Chair Gudni
Agustsson — and the urban faction associated with Asgrimsson.
Asgrimsson bypassed Agustsson when he handpicked technocrat Jon
Sigurdsson for the chairman position. This only further complicated
intra-party arbitration, and Sigurdsson did not succeed in settling
the disagreements in the party. Sigurdsson led the PP through the
2007 parliamentary elections where it suffered its worst outcome in
any parliamentary elections, receiving only 11.7 percent of the
national vote.

¶4. (SBU) In the 2007 campaign, the Progressives were hamstrung by
the public’s perception that the party was rife with cronyism that
was just shy of outright corruption. In what became an emblematic
case, about a month before the election the Althingi granted
Icelandic citizenship to the soon-to-be daughter-in-law of Minister
of Health Jonina Bjartmarz under circumstances in which political
connections seemed to many to be the deciding factor. Given its
command of the Ministry of Industry and Commerce, the party also
took the brunt of controversy over expansion in the aluminum sector
and resulting environmental concerns. Many Progressives complained
that somehow their coalition partner, the Independence Party, reaped
all the credit for Iceland’s booming economy while the PP was left
to take the blame for unpopular side effects of the expansion. The
party was hammered on Election Day, dropping from 12 Althingi seats
to seven and failing to win a single seat in the Reykjavik district.
Though the IP-PP coalition still held a one-seat majority, IP Chair
Geir Haarde chose instead to build a larger majority with the Social
Democratic Alliance, leaving the Progressives out in the cold.

¶5. (U) Sigurdsson resigned as chairman after the elections and was
replaced by Deputy Chairman Gudni Agustsson. This opened a window of
opportunity for Agustsson to guide the party back to its traditional
roots to try to regain some of the recently lost support. Agustsson
was ineffective at unifying the broken party and the PP did not
bounce back in opinion polls. In November 2008, he resigned suddenly
from the position of chairman after a bitter central committee
meeting at which the party’s youth wing made clear its unhappiness
with his leadership. Deputy Chairman Valgerdur Sverrisdottir headed
the party until the January 2009 party national congress where the
party elected a new leadership. Sverrisdottir herself did not seek
election as chairman and when early elections were called for April
2009 announced that she would be retiring from politics.

¶6. (U) The national congress was historic for two reasons. First,
an outsider was elected chairman of the party for the first time,
namely 34-year-old Sigmundur David Gunnlaugsson, who had joined the
party only one month earlier. Though Gunnlaugsson’s father had
represented the party in parliament in the 1990s, Gunnlaugsson had
no prior political experience. Second, the PP resolved at the
congress to support starting accession negotiations with the
European Union (EU) given certain preconditions.

¶7. (SBU) During the January public demonstrations in Iceland when
the majority coalition was teetering on the brink of collapse, the
PP, under the leadership of new chairman Gunnlaugsson, informed the
Social Democratic Alliance (SDA) and the Left-Green Movement (LGM)
that if they were to form a minority coalition, then the PP would
defend it. On February 1, the SDA and LGM did indeed form a minority
coalition government and the PP pledged to defend it against
no-confidence motions in the Althingi. For the first few weeks after
the new chairman was elected, the party surged in the polls, at
times measuring at over 20 percent. Support has started to dwindle
since then as the party has struggled at finding the balance between
defending the government — and therefore bearing some of the cost
of unpopular decisions — and not having any direct influence over
the SDA-LG coalition’s policies.

¶8. (SBU) Gunnlaugsson’s lack of experience in the political arena
is also raising doubts. The new party chair has in recent statements
all but excluded cooperation with the Independence Party after the
elections, but then in mid-March has also harshly criticized the SDA
for not being a „real“ party and called the SDA’s credibility into
question. At the same time, Gunnlaugsson’s praise for the LGM has
bordered on the saccharine, something of a break from tradition for
the centrist Progressives. Some believe that although the party
appears to be courting leftist elements, this could be a political
ploy and the PP could go back to its kingmaker role again, joining
either the center-right or the center-left forces in parliament.

¶9. (SBU) On foreign affairs the PP is pro-NATO, and took on a more
modern view on western defense cooperation under Asgrimsson, with
Icelandic participation in peacekeeping and post-conflict
reconstruction efforts. The party had advocated U.S. withdrawal from
Naval Air Station Keflavik in the (unspecified) long term, but
Asgrimsson had personally favored a U.S. presence and expressed his
personal feelings of betrayal in the harshest terms. While the
party had traditionally been anti-EU, Asgrimsson attempted to sway
the party to a more EU-friendly position and had scandalized many in
2006 with a prediction that Iceland would become a member by 2015.
Subsequent chairmen have all been pro-EU with the exception of the
traditionalist Agustsson. Their efforts to move the party in the
direction of Europe eventually came to a head at the national
congress in January where the party decided to drastically modify
its position and stated its preference for starting negotiations
with the EU. That said, Chairman Gunnlaugsson’s position on the EU
can best be described as „open“ to EU membership rather than as
advocacy. He is otherwise something of a tabula rasa on foreign
policy issues.

VAN VOORST

http://wikileaks.is/cable/2009/03/09REYKJAVIK61.html

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SENSITIVE

E.O. 12958: N/A
TAGS: PGOV ECON EFIN IC
SUBJECT: ICELANDIC CENTRAL BANK HEAD PUBLICLY GOES ON DEFENSIVE

¶1. (SBU) Iceland’s Central Bank Chairman of Board of Governors David
Oddsson refused to accept blame for the October bank collapse and
subsequent economic recession during his appearance on Icelandic
State Television’s current affairs program „Kastljos“ on February
¶24. Well-prepared and often portraying himself as a victim, Oddsson
confronted the interviewer from the start of the program by refuting
the assertion that he did not have the trust of the public: Oddsson
called a recent poll stating that 90 percent of Icelanders want him
to resign as inaccurate. The embattled Central Bank Chairman
continually returned to three main themes throughout the interview:
1) he and the Central Bank had repeatedly warned the Haarde
administration about the state of the Icelandic banking system; 2)
the fault of the collapse lies with the Haarde government, and the
banks themselves; and 3) the Central Bank has kept the economy
afloat after the crash and he and the institution enjoy the trust of
the people and international community.

¶2. (SBU) Oddsson supported his points by quoting passages from
several Bank reports warning the government of the impending crisis
(but declined to release the documents.) He said that he was
confident a full investigation into the cause of the banks crash
would exonerate him and the Central Bank. When asked why he does
not step down and allow the rebuilding process to fully begin,
Oddsson declared that he is still trusted in his position. The
interviewer read a list of domestic politicians, economists, and
foreign experts who have called for Oddsson’s resignation to restore
trust in the Icelandic Central Bank; Oddsson responded that those
individuals had either a hidden agenda or were not familiar with
international economic policy. He called the current Prime
Minister’s Central Bank reform bill, which restructures the Bank’s
leadership to eliminate Oddsson’s position, „nonsense“ and accused
the PM of settling an old political score. Oddsson said the Central
Bank has kept the economy afloat in the wake of the crash and that
it was the Central Bank that foreign creditors trusted to insure
transactions. Finally, when asked if he would entertain the idea of
re-entering the political area, Oddsson noted that he had no
intention of returning to politics. Speculation in Iceland,
however, is that Oddsson was using the interview as a platform to
reignite his political career.

¶3. (SBU) Comment: Oddsson’s performance on Kastljos was political
theater at its most florid, confirming Oddsson sees himself as the
last great bulwark standing up to a destructive and incompetent
government economic and financial structure. Those close to former
PM and departing IP Chair Geir Haarde have marveled at Oddsson’s
stubborn determination and his disregard for the damage his
continued tenure is causing the IP. This was clearly evident in his
willingness to publically blame Haarde and his government for
Iceland’s economic collapse – and this despite the fact that
Haarde’s refusal to fire Oddsson, his old friend and mentor, was one
of the chief reasons for the fall of the previous government.
Oddsson is correct in his assessment that most of the provisions in
the proposed new Central Bank law are directed at him personally.
What he did not acknowledge is that his continued presence at the
Bank has become a severe distraction as the economic crisis deepens.
Oddsson is now such a polarizing figure that we doubt any
government can concentrate on Iceland’s reconstruction while he
remains at the Central Bank. Oddsson left no one in doubt last
night that he will continue to run rings around the interim
government as he fights off attempts to separate him from the job.
Not for nothing was Oddsson the most charismatic, crafty, and
resourceful politician in Iceland’s recent history. The question is
whether that old magic will work with a battered people looking for
answers as to how their economy fell so far so swiftly, and hungry
for new political leadership able to point the way out of the
catastrophe.

VAN VOORST

http://wikileaks.is/cable/2009/02/09REYKJAVIK39.html

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SIPDIS
E.O. 12958: N/A
TAGS: ECON ETRD EFIN CVIS IC
SUBJECT: ICELAND CENTRAL BANK CRISIS: ODDSSON’S NAILS FLAG TO MAST

¶1. (SBU) SUMMARY. Iceland Central Bank’s Chairman of the Board of
Governors, David Oddsson, refused Prime Minister Johanna
Sigurdardottir’s request to resign on Sunday. The Prime Minister
made her request by letter of February 2, pending passage of a law
allowing the government to dismiss the three governors. The two
other Board governors, Ingimundur Fridriksson and Eirikur Gudnason,
also received letters. Mr. Gudnason followed Mr. Oddsson and
refused to resign, while Fridriksson agreed to step down. The Prime
Minister expressed extreme disappointment with Oddsson’s decision,
stating that the people of Iceland need new leadership in order to
restore trust in the Central Bank. END SUMMARY
——————————————-
PM Calls for Central Bank Directors to Resign
——————————————-

¶2. (SBU) PM Johanna Sigurdardottir sent a letter to the three
Central Bank governors on February 2, asking them to hand in their
resignations by February 6. In the letter, the Prime Minister
stated her desire to replace the Central Bank Board with a single
new director under a proposed law reorganizing the structure and
management of the Bank. The new bill, to be considered by Parliament
shortly, would replace the tripartite board with a single director,
appointed by the Prime Minister for a seven-year term. The Director
position would be publically advertised and filled with an
experienced banking professional with at least a master’s degree in
economics (Oddsson is a professional politician with no economics
education).
¶3. (SBU) In addition, the proposed legislation would create a new
Monetary Policy Committee within the Bank. The Monetary Policy
Committee would be comprised of five members: the Governor of the
Central Bank, who would chair the committee, two of the Bank’s
executives responsible for formulating and implementing monetary
policy, and two experts appointed by the Governor with the
endorsement of the Prime Minister. The Monetary Policy Committee
would make all decisions on the Bank’s monetary policy control
mechanisms.
¶4. (SBU) On February 6, Ingimundur Fridiksson sent his response
stating his intention to resign. Eirikur Gudnason declared his
intention to stay on. David Oddsson waited to February 8 to
announce his decision to stay on, when a copy of his response letter
to the Prime Minister was made public on the Central Bank of
Iceland’s website.
—————————-
David’s Response: I Won’t Go
—————————-
¶5. (SBU) David’s Oddsson’s response to the Prime Minister was a
scathing rebuttal to her request. He said her letter was
threatening, and accused the governing coalition of misconduct and
biased conclusions. Oddsson claims that he and the Central Bank
Board of Governors were among the first to warn of the impending
banking collapse, and pointed the finger at unnamed ministers whose
motive for getting Oddsson out of the Bank is personal vengeance
rather than „substantive fault with (his) work.“ Leaving little
doubt as to his intentions, Oddsson defiantly concludes, „For my
part, I have never abandoned any task that I have agreed to take on,
and I do not intend to do so now.“

¶6. (SBU) On Sunday evening, the PM of Iceland issued a statement in
response to Oddsson’s letter, stating that Oddsson clearly did not
share the government’s opinion that appointing new employees to the
Central Bank would increase the people’s faith in the system. She
also stated her hope that the bill on the reorganization of the
Central Bank would be passed quickly by Parliament.

————————————
Legal Authority for Dismissal Unclear
————————————

¶7. (SBU) The Prime Minister’s legal recourse is unclear. There is
no custom or precedent to fire Central Bank governors. Under the
Law on the Central Bank on Iceland (2001), and according to the Law
on the Rights and Duties of Civil Servants, however, it is possible
for a governor to be „dismissed temporarily“ if he has not been
punctual, or has shown other negligence, disobedience to a legal
request or prohibition from his superior, ignorance, or carelessness
on the job. In addition, he can be „dismissed temporarily“ if he
has shown unsatisfactory results, has been inebriated on the job or
his behavior or actions [on the job] has otherwise been considered
improper, inappropriate, or irreconcilable with the job. It remains
to be seen if the Prime Minister will try to use existing statutes
to fire Oddsson immediately or wait until the Parliament’s near
certain passage of the new Central Bank law.
¶8. (SBU) COMMENT. Many believe the Prime Minister will wait until
the new Central Bank legislation is enacted. The new legislation
would automatically make the Bank Board positions redundant.
Iceland’s public continues to demand accountability and express
their strong desire to clean house. Editorials wonder why Oddsson
refuses to leave when his very presence in the Central Bank does
nothing but harm the international standing of the tattered
Icelandic financial sector. Oddsson may believe he played no role

REYKJAVIK 00000030 002 OF 002

in the economic crash, but many Icelanders (and much of the
international economic press) hold the Bank – and Oddsson in
particular – responsible for not curbing the banks. Meanwhile, the
public bickering between the Prime Minister and the Central Bank
Director has done little to shore up international investor
confidence in the country. It is still an open question whether
Oddsson has the political backing from the old guard Independence
Party to withstand the demand of the public and government to step
down. Demonstrators, fresh from bringing down the previous
government, have assembled again in front of the Bank. END
COMMENT.
Van Voorst

http://wikileaks.is/cable/2009/02/09REYKJAVIK30.html

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E.O. 12958: DECL: 10/07/2018
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC ECONOMIC CRISIS: THIRD BANK GOES DOWN AS MASS
FIRINGS START

REF: Reykjavik 223

Classified By: DCM Neil Klopfenstein for reasons 1.4 (b) and (d).

1.(C) Summary: The Icelandic economic crisis worsened as the
last(and largest) of the big three banks, Kaupthing, was taken over
by the Icelandic government; the Icelandic stock exchange was shut
down until Monday; one-third of Landsbanki employees were fired; and
two new entities were created to take over domestic operations of the
former Landsbanki and Glitnir banks. The possibility of a Russian
loan continues to generate GOI assertions that finances and foreign
policy can be kept separate. The Prime Minister stated that the
Icelandic government had not asked for a loan from the IMF, but
discussions continue in Reykjavik. The Minister of Finance travels
to Washington today, and his meeting at the U.S. Treasury Friday will
be important in focusing the Icelanders on a viable way through this
disaster. End Summary.

¶2. (SBU) The Chairman of Kaupthing Bank’s Board, Sigurdur Einarsson,
blamed British authorities for Iceland’s Financial Supervisory
Authority (FME) take over of Kaupthing in the early hours of October
¶9. The FME, which used the new emergency legislation authority,
asserted that the takeover will insure continued commercial bank
operations in Iceland and that Kaupthing’s domestic deposits are
fully guaranteed. Einarsson said the British authorities’ October 8
seizure of Kaupthing Edge deposit accounts valued at 3 billion
pounds, and the forced suspension of payments of Kaupthing’s
subsidiary in London, had been interpreted as a technical default on
loans by Kaupthing’s creditors. The British apparently invoked
anti-terrorism laws created in the aftermath of 9/11 to freeze
Icelandic assets in the UK. The Icelandic media is reporting that UK
Chancellor Darling took this action after a miscommunication with
Minister of Finance Arni Mathiesen over whether Landsbanki’s IceSave
accounts in the UK would be guaranteed by the Icelandic authorities.
The association with terrorism has infuriated Icelandic authorities.

¶3. (SBU) Iceland closed its stock exchange this morning. An official
statement from the OMS Stock Exchange said, „Due to unusual market
conditions NASDAQ OMX Iceland has decided to suspend temporarily
trading on its equity markets. The equity markets will re-open for
trading on Monday, October 13.“

¶4. (SBU) Despite assurances yesterday by the Minister of Commerce and
the Minister of Finance that bank employees would not lose their
jobs, Landsbanki fired one-third of its employees today. This will
likely impact the unemployment rate by close to half a percentage
point. The FME created two new bank entities „New Landsbanki Island,
hf“ and „New Glitnir Bank, hf“ to conduct the domestic operations of
their predecessor banks.

¶5. (C) The Russian loan is still part of Iceland’s plan. Prime
Minister Haarde said last night that the loans from the IMF and
Russia „are not mutually exclusive“ though the government had not
asked IMF for a standby loan or an economic program. He repeated
that statement in a press conference today. Questions about the
influence the loan might give Russia continue to be met by assertions
that finances and foreign policy can and will be kept separate.

¶6. (C) Minister of Finance Arni Mathiesen travels to Washington
tonight for World Bank meetings. Post persuaded the Minister to
agree to meet with senior Treasury officials while in the U.S.
Mathiesen will meet with Treasury A/S Clay Lowery on October 10. We
would hope this meeting will help the Icelanders think their way
through the present crisis and move from a stopgap reactive approach
to a durable comprehensive plan. It should also make clear to them
how the U.S. can and cannot be of assistance and point them in the
direction of other options.

van Voorst

http://wikileaks.is/cable/2008/10/08REYKJAVIK227.html

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E.O. 12958: DECL: 11/13/2019
TAGS: PGOV PREL EFIN IC
SUBJECT: INDEPENDENCE PARTY LEADER SEEKS MEETING WITH WHITE
HOUSE TO DISCUSS IMF

Classified By: CDA SAM WATSON FOR REASONS 1.4 (B) AND (D)

1.(C) Summary. Charge d’Affaires (CDA) met Bjarni
Benediktsson, leader of the opposition Independence Party, to
discuss a range of issues on November 11. Benediktsson was
eager to discuss a letter that he had sent recently to the
National Security Council (NSC) requesting a meeting with a
senior White House official. Were he to receive such a
meeting, Benediktsson said he would express outrage with how
the IMF was used as a tool against Iceland in the Icesave
dispute. He also would like to talk about future
opportunities for bilateral cooperation between Iceland and
the United States. End Summary.

Frustration with the IMF,s Role in Icesave
——————————————— –
¶2. (C) Charge d’Affaires met opposition Independence Party
Chairman Bjarni Benediktsson to discuss a range of issues on
November 11. Benediktsson said that one reason he hoped to
meet a high ranking official from the White House was to
express frustration with the role the IMF played in the
Icesave dispute. He opined that the Icesave matter was,
originally, an issue that involved only the
Governments of Iceland, Great Britain and the Netherlands.
The dispute among the three countries, he said, centered on
whether the Icelandic government must serve as guarantor for
British and Dutch depositors that lost money when the
Icelandic banking system collapsed. There was no EU
legislation, according to Benediktsson, that obligated
Iceland to act as such a guarantor and legal precedents on
the topic were murky at best. Great Britain and the
Netherlands, he said, understood that they were not operating
from positions of strength and brought the IMF into the
equation to force Iceland’s hand. The threat of withholding
IMF loans until the Icesave dispute was resolved was used to
force the Government of Iceland to capitulate. It was, he
contended, a great misuse of the IMF and completely unfair to
Iceland.

¶3. (C) Benediktsson suggested that, at this point, the best
thing that could happen for the Icelandic people would be for
the measure to fail in a Parliamentary vote. The British and
Dutch would then, he said, be forced to sue the Government of
Iceland and seek compensation via the courts. A legal
solution would, he felt, be more preferable than the
negotiated settlement that is being thrust on the people of
Iceland. Benediktsson added that if the British and Dutch
did not feel comfortable pursuing the matter via Icelandic
courts, he would be happy to suggest that the issue be
resolved by a tribunal of independent judiciaries. He even
suggested that a U.S. Supreme Court Justice could play a role
as an arbitrator in the proceedings.

¶4. (C) Bendiktsson said that, in an attempt to force the
issue into the courts, he intends to oppose the
government-sponsored Icesave bill when it comes up for a vote
in Parliament. (Note: Benediktsson, along with most of his
opposition Independence Party colleagues, abstained when the
previous law was passed in August. End note). He
acknowledged, however, that the coalition government probably
had the votes necessary to pass the measure through
parliament. He also admitted that, were he to have his way
and the bill fail in parliament, it could further stall
Iceland’s recovery efforts. It would certainly mean no
further loans from the IMF and, without that cash inflow, the
government would be unable to lift its capital control
restrictions and would likely have to issue Euro bonds to
raise the necessary capital. He also said he was not anxious
to assume leadership of the government, but preferred to
remain in opposition until after the May 2010 municipal
elections to benefit candidates from his party.

Increased Bilateral Cooperation with the U.S.
——————————————— —
¶5. (C) Benediktsson also hoped to discuss with the White
House ways to promote bilateral discussion and cooperation
between the United States and Iceland. He said that when the
U.S. withdrew from the Keflavik Air Base in 2006 it created a
public perception that the relationship between Iceland and
the United States was deteriorating. This perception, he
suggested, has only been enhanced with Iceland’s recent
application to join the European Union. Benediktsson
acknowledged that the Strategic Dialogue allows for annual
high level meetings between U.S. and Icelandic government
officials. He felt, however, that even more dialogue was
necessary. Benediktsson was somewhat vague with suggestions
on how to accomplish this but suggested that the Parlimentary

REYKJAVIK 00000203 002 OF 002

Foreign Affairs Committee visit the United States. He then
asked whether, considering Iceland’s current financial
problems, there might be some U.S. financing available to
facilitate such a trip. (Note: Benediktsson later sent CDA a
follow up email expressing continued interest in meeting with
an official from the White House even if he came alone. End
note.)

¶6. (C) Comment: Benediktsson continues to seek a meeting
with a high-ranking White House official to discuss
increased cooperation and the IMF vote even though IMF board
review vote is long past. His request may be a political
ploy designed to embarrass his opponents in the government
and make waves in the media. On the other hand, it could
also fit into the agenda of his Independence Party, an
organization which has traditionally supported strong ties
with the United States and fiercely opposes Iceland’s
application to join the EU. Given his proposed solution on
Icesave, namely send it to the courts, his angle appears more
likely political than economic. End comment.
WATSON

http://wikileaks.is/cable/2009/11/09REYKJAVIK203.html

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STATE FOR EUR/FO A/S Dan Fried

E.O. 12958: DECL: 10/26/2018
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC ECONOMIC CRISIS: GOI OFFICIALS CAUTIOUSLY
OPTIMISTIC IN MEETINGS WITH USG

Classified By: Economic Section Chief Fiona Evans for reasons 1.4 (b)
and (d).

1.(C) Summary: During the October 24 visit of U.S. Treasury
Department Acting DAS Eric Meyer and Iceland desk officer Larry
Norton, the visiting International Monetary Fund team in Reykjavik
announced it had reached an agreement with Icelandic officials on a
2.1 billion USD loan deal. With this agreement on the table, the GOI
focused its conversations with Treasury on plans to move forward,
including discussing the obstacles to floating the krona, and finding
the additional cash loans to supplement the IMF funds. The Prime
Minister and Finance Minister traveled to Helsinki on October 26 to
meet with their counterparts to ask for additional funding. No
Icelandic official asked for USG funding support. However, DAS Meyer
indicated that USG would support the IMF deal within the IMF.
Several officials took the opportunity to complain about British
actions at the outset of the crisis (including freezing the banks’
U.K. assets under an anti-terrorist law), with Central Bank Head
David Oddsson going to the extreme of comparing Gordon Brown to
Mussolini. The Russian loan still seems to be a possibility, but the
IMF deal has pushed this prospect to the back burner. Everyone
acknowledged that the road ahead would be painful, but maintained a
sense of cautious optimism. End Summary.

¶2. (C) Central Bank Governor of the Board David Oddsson opened his
meeting with the Treasury visitors by asserting that the Financial
Times had misquoted him in saying he blamed the Fed and other Central
Banks for the Icelandic collapse; he had said only that he was
„disappointed in them.“ He emphasized the need for a show of
strength and predicted that the IMF loan would be small and would be
disbursed incrementally. Oddsson and Director of International
Markets Sturla Palsson warned of investors hedging „against us“ and
the need to show strong reserves so that „we can stand a speculative
run against the Icelandic krona.“ Palsson said they were prepared to
use a tight monetary policy and the priorities were to 1) create the
new banks, 2) get the payment systems in order, and 3) get the bond
market up and running. They were cautiously optimistic on the
economic outlook, and Palsson asserted, „the time to normalcy will be
shorter than the textbooks tell us.“ He was confident the krona
could be floated sooner than the IMF estimate of six months to a
year.

¶3. (C) Oddsson was clearly bitter about the UK’s freezing of
Icelandic assets and compared Gordon Brown’s actions to Mussolini’s
Ethiopian venture in 1935 in which a large country brought about the
ruin of a defenseless small one. Oddsson said they were doing their
utmost to respond to creditors in a „fair and open way“ and cited the
hiring of known specialists to ensure there is no favoritism. He
said that the government’s new emergency law prioritizes depositors
over other creditors and that the law lumps all depositors together
(retail and wholesale). Oddsson said that the EU Directive on
banking establishes a bank fund to serve as a guarantor of the
deposits. This works well in a system in which hundreds of banks
contribute, but obviously is not a good system when there are only
three banks. The Icelandic bank fund isn’t sufficient to guarantee
the losses that have been incurred by the bankruptcy of the three
Icelandic banks. The legal question now is whether the state is the
back-up institution when the bank fund is exhausted. The UK argues
yes, but Iceland sees it completely differently. This is a question
that must be settled in court. Regarding the bond holders, Oddsson
said that creditors will be surprised when they receive much more
than what is currently being traded. Both Oddsson and Palsson
reiterated how important it is to restore trust in the system.

¶4. (C) At the Financial Supervisory Authority (FME), Head of Foreign
Operations Hlynur Jonsson gave a technical description of recent
events. He said that the three new banks (New Glitnir, New Kaupthing
and New Landsbanki) had been formed from the Icelandic deposits and
internal business of the old banks; the old banks would receive a
bond, which would be evaluated by an international evaluator within
90 days, for the new banks. The state will have to capitalize the
new banks with bonds issued by the old bank to cover the difference.
Jonsson said they needed to liquidate the old banks without ruining
Iceland’s international reputation. Jonsson said the foreign
operations were left in the old banks and are limited because of the
authorities in various jurisdictions. He said the situation is most
complex in the UK and in Luxembourg, „where huge repos with the
European Central Bank and the mother company owing subsidiaries might
make it possible to save the subsidiaries.“ Jonsson said that they
are talking with their counterparts in other countries and that
everything is going well except with the U.K. When asked about the
long term impact of what has happened, Jonsson and Gudrun Jonsdottir,
Head of the Securities Market, said they were still putting out fires
and were not able to answer just yet.

¶5. (C) Finance Minister Arni Mathiesen said the IMF deal was not
complicated; its focus was on banking structures, monetary policy
(key to restoring some confidence in the currency) and fiscal policy
(how the government manages the very high debt it will incur as a

REYKJAVIK 00000252 002 OF 002

result of the crisis.) Mathiesen said in his mind, there were no
areas of disagreement. He said he would travel with the Prime
Minister on October 26 to Helsinki for two days of meetings with
their Nordic counterparts where they anticipate raising further
funds. When asked whether Iceland had approached the EU, Mathiesen
said he had talked to French Finance Minister Lagarde and that it
seems the EU does not have a structure to tackle these kinds of
financial problems and that the assistance would likely be in
post-program. He said Foreign Minister Kouchner and Lagarde may be
coming to Iceland at some point. He expected the krona to plunge
when it is floated but hoped it would stabilize at more or less the
current level (115 ISK to 1 USD).

¶6. (C) The Permanent Secretary of the Prime Minister’s Office, Bolli
Bollason, said the formal decision to seek IMF assistance had been
approved in a Cabinet meeting earlier in the day (Oct. 24.) Bollason
understood the size of the IMF package was unusual relative to
Iceland’s size (as a percentage of Iceland’s IMF quota, the program
will be bigger than most in IMF history) and said that it was
fundamental to restore stability in Iceland. He said that the main
concern is passing the hurdle of floating the ISK. He said that the
Prime Minister was preparing for the Nordic Prime Ministerial meeting
in Helsinki on Monday with his Nordic counterparts, to request funds
or swap lines or both. Asked about how Iceland would fill the 4
billion USD gap between the IMF funding and the purported 6 billion
USD necessary, Bollason said they asked Central Bank Governor Oddsson
to call his counterparts in the Nordics and ask how far they are
willing to go. Bollason said in his personal opinion, he didn’t
expect the Russians to contribute money, that Iceland had not been in
contact with the Russians since the Icelandic team left Moscow, but
said „let’s see how things develop.“

¶7. (C) Director of the Institute of Economic Studies at the
University of Iceland Gunnar Haraldsson told Meyer and Norton that
the repercussions of the crisis would be painful. He predicted
inflation, mass layoffs, business bankruptcies, and a brain drain.
He described the hardships that many Icelanders now face with their
payments on foreign currency loans (on their houses and cars)
resetting with the krona’s depreciation. He saw the IMF as the only
way out, and even with their help, it would be a rough 6 to 12 months
ahead.

¶8. (U) This cable has been cleared by Treasury.

VAN VOORST

http://wikileaks.is/cable/2008/10/08REYKJAVIK252.html