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Cablegate: Icelandic Govt Takes Control of Banking Sector Amid Crisis

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E.O. 12958: N/A
TAGS: ECON EFIN PGOV IC
SUBJECT: ICELANDIC GOVT TAKES CONTROL OF BANKING SECTOR AMID CRISIS

REFS: A) Reykjavik 217 B) Evans-Norton telecon C) Evans-Meyers
telecon
1. (U) Summary: Prime Minister Geir H. Haarde addressed the nation
late on October 6 with a sober message: the banking system in
Iceland was broken because of the global liquidity crisis and the
government was taking emergency action to save Icelanders' domestic
savings. Immediately following his address, Haarde presented
emergency legislation at Althingi (Parliament) which passed just
before midnight. This legislation gave the Icelandic government
power to create financial institutions and to intervene in existing
ones. It removed the cap on insurance for domestic savings deposits
in Icelandic krona and allowed the State Housing Fund to take over
all mortgages.
2. (SBU) Summary continued: Icelanders woke up on October 7 to
learn that Landsbanki, the biggest bank in Iceland, was being taken
over by the Financial Supervisory Authority. They heard assurances
that domestic savings were safe and domestic banking operations
would continue. The Icelandic krona started trading at 127 to USD,
over a 100 percent devaluation from January 1 and bad news for
Icelanders who have foreign currency mortgages and car loans, but
the Central Bank quickly pegged the krona at 96 to USD. A five
member team from the International Monetary Fund arrived on Sunday
at the invitation of the Prime Minister and is providing advice.
The media reported that Russia is offering a 4 billion euro loan to
the Central Bank but there has been no official announcement that
the loan is accepted or how that will affect the current situation.
We continue to monitor this fluid situation. End Summary.
3. (U) Following a weekend of continuous meetings with stakeholders,
Prime Minister Geir H. Haarde addressed the nation at 4:00 pm on
October 6 with serious news. He explained the current financial
crisis was a global problem and Icelandic banks' past success meant
that their liabilities are too large for the government (we
understand about eight times GDP) to offer them a secure lifeline.
Haarde hinted that the Icelandic financial system might be at the
edge of breakdown and he would not risk Iceland's future for a
bailout. He said the banking system would have to be redesigned
for Iceland before it could conduct international business again and
announced that the buying and selling of stocks in the financial
institutions would continue to remain frozen. He said that all of
the nation's savings deposit would be secured. He called for unity
among people and that the nation should stick to the values they
hold dearest. Haarde reminded that Iceland was blessed with natural
resources and that would ensure a bright future even if the
financial system will need to be rebuilt. He closed his address
with "God Bless Iceland," a phrase rarely used by politicians here.
4. (U) Soon after the address, the PM introduced emergency
legislation at the Althingi (Parliament) which shortly passed before
midnight with a few minor changes suggested by the opposition. The
newly passed emergency legislation gives the Icelandic government
power to create financial institutions and to intervene in existing
ones. Under the law, the government has wide-ranging authority to
take over banks, seize control of management and direct asset sales.
The bill will also allow the government to take over housing loans
held by the banks and put them in a government housing fund, an
effort to help thousands of Icelanders who faced the loss of their
homes amid rising payments due to inflation and the krona's
devaluation (Note: All mortgages are inflation indexed and many were
denominated in foreign currency. End Note.) A critical part of the
new law is that Government of Iceland ensures that deposits in
domestic commercial and savings banks and their branches in Iceland
will be fully covered. "Deposit" refers to all deposits by general
customers and companies which are covered by the Deposit Division of
the Depositors and Investors Guarantee Fund.
5. (U) On October 7, the Icelandic Financial Supervisory Authority
(FME) announced that it had proceeded to take control of Landsbanki,
the largest bank in Iceland. The FME announced in a statement that
all domestic deposits are fully guaranteed and that all Landsbanki
domestic branches, call centers, ATMs, and Internet operations will
be open for business as usual. The statement continued that the
action taken is a necessary first step in achieving the objectives
of the Icelandic Government and Parliament to ensure the continued
orderly operation of domestic banking and the safety of domestic
deposits.
6. (U) At opening of business on October 7, the Icelandic krona was
trading at 127 to USD, over a 100 percent devaluation from January
1. The media reported at 10 am local time that the krona is now
pegged at 96 to USD. The Central Bank announced the fixing of the
krona at a rate corresponding to 131 per euro, effective immediately
and that further moves to boost the currency will be announced in
coming days.
7. (SBU) A five member team from the International Monetary Fund
arrived on Sunday at the invitation of the Prime Minister. Econoff
talked with Rodolfo Luzio of the IMF team who confirmed that they
are providing advice to the Government and that all options are on

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the table for IMF assistance. Luzio said that the IMF had been
watching Iceland for some time and had visited earlier this summer.
He noted that the situation was very fluid and he was unable to
predict how long he would be in Iceland or what assistance would be
provided. Luzio said that the plan for bank intervention was a done
deal before they arrived on October 5.
8. (U) On October 7, the Russian Ambassador to Iceland, Victor
Tatarintsev, informed David Oddsson, the Chairman of the Board of
Governors of the Central Bank of Iceland, that Russia will provide
Iceland with a 4 billion Euros or 5.4 billion USD loan. The Central
Bank said in a statement that the loan would substantially
strengthen Iceland's foreign reserves and support the Icelandic
krona. The Central Bank said the loans were for three to four years
on terms that would be 30-50 points above Libor rates. According to
Reuters, Russian Deputy Finance Minister Dmitry Pankin said no
decision had been taken on the loan.
VAN VOORST

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