Classified cable from US Embassy Reykjavik on Icesave dated 13 Jan 2010

01/13/2010

FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

SIPDIS

TREASURY FOR SMART AND WINN, NSC FOR HOVENIER, DOD FOR FENTON

E.O. 12958: DECL: 01/13/2020
TAGS: ECON, EFIN, IC, PGOV, PREL
SUBJECT: LOOKING FOR ALTERNATIVES TO AN ICESAVE REFERENDUM

REF: REYKJAVIK 9

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

1. (C) Summary. CDA met with Ministry of Foreign Affairs Permanent
Secretary Einar Gunnarsson and Political Advisor Kristjan Guy Burgess
January 12 to discuss Icesave. After presenting a gloomy picture
of Iceland's future, the two officials asked for U.S. support. They
said that public comments of support from the U.S. or assistance in
getting the issue on the IMF agenda would be very much appreciated. They
further said that they did not want to see the matter go to a national
referendum and that they were exploring other options for resolving the
issue. The British Ambassador told CDA separately that he, as well as the
Ministry of Finance, were also looking at options that would forestall
a referendum. End Summary.

2. (C) CDA met with Permanent Secretary Einar Gunnarsson and Political
Advisor Kristjan Guy Burgess at the Icelandic Ministry of Foreign Affairs
on January 12 for a two hour marathon meeting to discuss Icesave. The
Icelandic officials painted a very gloomy picture for Iceland's
future. They suggested that the most likely outcome for the country
was that the Icesave issue would fail in a national referendum. Should
that occur, they suggested, Iceland would be back to square one with
the British and the Dutch. The country, however, would be much worse
off because it would have lost international credibility and access to
financial markets. Gunnarsson suggested that the Icesave issue, if it
continues along its present course, would cause Iceland to default in 2011
when a number of loans become due and could set Iceland back 30 years.

3. (C) The two government officials stressed that Iceland needs
international support. CDA reiterated that the United States was neutral
on this bilateral issue and hoped for a speedy resolution. Moreover,
the U.S. had supported Iceland's position at the last IMF Review and
expected to do so again depending on the circumstances. Gunnarsson and
Burgess responded that they understood the United States' stated position
of neutrality on the issue; however, they expressed the view that it
was impossible to remain neutral regarding the Icesave matter. Iceland,
they said, was being bullied by two much larger powers and a position
of neutrality was tantamount to watching the bullying take place. They
suggested that a public statement from the U.S. in support of Iceland
would be very helpful. They also felt that U.S. intervention in the
IMF could be of assistance, specifically if it was targeted at getting
Iceland's review placed on the IMF agenda. Gunnarsson acknowledged that
U.S. support during the review was appreciated but, realistically,
the issue would never make it on the agenda unless external pressure
was applied on the IMF.

4. (C) Gunnarsson and Burgess were extremely pessimistic regarding
the national referendum and said that the Government of Iceland was
exploring other options to resolve the Icesave situation. They hinted
that renegotiation might be a viable alternative and referenced recent
meetings between the government and the opposition at which this option
was discussed. Everyone could potentially save face, they suggested,
if a new repayment agreement was reached with the British and Dutch that
could possibly include a lower interest rate for the loan. This solution,
they felt, would be palatable to the Icelandic people and potentially
to the opposition as well. They did not know, however, whether the
British and Dutch would agree to another round of negotiations. They
also acknowledged that any new agreement would have to be approved in
parliament and, of course, signed by the president.

5. (C) On January 13, CDA also discussed the situation with British
Ambassador Ian Whiting who said that Britain might consider options that
would forestall a national referendum on the Icesave issue. The Ambassador
said, however, that the British Government was receiving mixed messages
from the Icelanders who, one week ago, seemed content to move forward with
a referendum (as the Prime Minister had conveyed to her UK counterpart)
but now appeared to be looking at other options. For example, the Ministry
of Finance was already looking at ways to improve the agreement but not
undermine the obligation or certainty of payment. He outlined for CDA
a potential solution that he was exploring that would involve Norway
loaning Iceland the money to cover the Icesave debt. This idea, he felt,
had merit because it would create a situation in which the Icelandic
Government was dealing with a country that it perceived to be sympathetic
to its situation, a fact that could remove some of the animosity from the
renegotiations. Negotiating a good loan repayment agreement with Norway,
said Whiting, would allow both sides to claim victory. The British and
Dutch would receive their money and Iceland would be able to repay its
debts under more favorable terms. He was going to discuss the idea with
the Norwegian Ambassador that same day.

6. (C) On January 13, CDA also met Iceland's Ambassador to the United
States Hjalmar Hannesson who was in Iceland. The Ambassador described
the potential constitutional crisis that would likely ensue should the
referendum go forward and fail, in essence a vote of no confidence. In
that case, the constitutionally apolitical Head of State would have
brought down the elected government, a possibility that several former
politicians in both parties had long ago agreed should not happen. Despite
his and his family's long association with the Progressive Party,
Hannesson said that this was not the time for elections or a change of
government. He added that he did not sense a willingness on the part
of the opposition to take control of the government. Noting that the
President, whom he has known for years, is considered "unpredictable,"
he hoped that a solution palatable to all sides in Iceland could provide
a way out.

7. (C) Comment: It is quickly becoming clear that very few of the
involved parties are comfortable with the Icesave issue being put to
a vote in a national referendum. Both the ruling coalition and the
opposition appear to understand that they must present a united front
for there to be any possibility of discussing alternative solutions with
the British and Dutch. At present, such cooperation remains elusive;
however, a number of closed door meetings between the opposition and
government will take place in the coming days to explore the full range
of potential solutions and, hopefully, to forge consensus. All of this,
however, remains in flux.  WATSON