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Cablegate: Icelandic Central Bank Asked Ny Fed for One Billion Usd Loan

VZCZCXRO8824
OO RUEHC
DE RUEHRK #0253/01 3031457
ZNY CCCCC ZZH
O 291457Z OCT 08 ZDK UR SVC #03389
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3867
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 REYKJAVIK 000253

SIPDIS

STATE FOR EUR/FO A/S Dan Fried

E.O. 12958: DECL: 10/26/2018
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC CENTRAL BANK ASKED NY FED FOR ONE BILLION USD LOAN
OR CURRENCY SWAP

REYKJAVIK 00000253 001.2 OF 002


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

1. (C) On October 24, the Central Bank sent a letter to the New York
Federal Reserve Bank requesting a one billion USD loan or currency
swap. The Embassy requested and today received a copy of the letter,
which was addressed to Timothy Geithner, President of the Bank. In a
cover memo dated October 28, the Central Bank emphasized to the
Embassy the importance of a medium term loan or currency swap
arrangements.

2. (C) Although aware of existence of the letter, the Ministry for
Foreign Affairs had not received a copy as of this morning and was
uncertain as to its contents. Benedikt Jonsson, Acting Permanent
Secretary, told the Ambassador that the MFA was sensitive about
making sure the correct USG authorities received the Icelandic
request. Jonsson told the Ambassador to expect a request from the
GOI for a loan "through proper channels", perhaps as early as this
afternoon.

3. (C) Comment: The Government of Iceland is obviously struggling
with problems of coordination and turf in dealing with the financial
crisis. Away for the first couple of weeks of the turmoil (due to
brain surgery), the Foreign Minister is attempting to reassert her
normal role in foreign affairs. The Central Bank, however, is
guarding its perceived prerogatives closely--and, judging from the
events of the last few weeks, unwisely. End Comment.

4. (U) Begin Text of memo to Embassy:

Please find attached the letter with Chairman David Oddsson sent to
President Geithner of the Federal Reserve Bank of New York last
Friday. Please take note that even though the letter emphasizes the
importance of a medium term loan, a swap arrangement could serve the
same purpose, not least if there is understanding that it would be
rolled over for a period of time that would be commensurate with the
financing of the economic program of the Government.

End Text.


5. (U) Begin Text of letter to Federal Reserve:

October 24

Mr. Timothy F. Geithner, President
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
USA

Dear Tim,

Friday afternoon, October 24, 2008, the Government of Iceland
announced that an agreement had been reached with the International
Monetary Fund on a stand-by arrangement subject to IMF Executive
Board approval which could take place early in the week of November
3, 2008. The details of the program will remain confidential until
late next week. For the program to succeed, financing beyond that
provided by the IMF will be necessary.

I refer to the discussions which we had towards the end of September
on our request for a currency swap arrangement between the Central
Bank of Iceland and the US Federal Reserve. I also refer to the
discussions which we had earlier in the year on the same subject. As
you explained to us, the main reasons for the Federal Reserve not
wishing to enter into a swap arrangement with the Central Bank of
Iceland were the relative size of the Icelandic banking system and
then in September discussions the absence of an IMF arrangement. As
you are no doubt well aware of, the Icelandic banking system has now
shrunk significantly. Additionally, as mentioned at the outset, the
Government has announced an agreement with the IMF on a standby
arrangement. For it to succeed, financing beyond that provided by
the IMF will be necessary.

I hereby request participation from the Federal Reserve Bank in the
financing of the economic program. Swap liens are short term in
nature, but we need a financing commitment over a longer term
horizon. Because of this, the Central Bank ideally needs a loan from
the Federal Reserve of a medium term maturity, preferably in an
amount of 1 billion USD. We are also seeking financing from other
sources.

I look forward to your prompt and favourable consideration of our
request. As always, I stand ready to provide additional information
as needed. Attached for your information is today's press release
issued by the Government.

Yours sincerely

REYKJAVIK 00000253 002 OF 002


Central Bank of Iceland
David Oddsson,
Governor and Chairman of the Board of Governors

End Text.

VAN VOORST

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