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Cablegate: Iceland's Request for a Loan: What's in It for Us

VZCZCXRO9845
OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHRK #0255 3050846
ZNY CCCCC ZZH
O 310846Z OCT 08
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3870
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L REYKJAVIK 000255

SIPDIS

STATE FOR EUR/FO A/S FRIED; TREASURY FOR A/S LOWERY

E.O. 12958: DECL: 10/29/2018
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELAND'S REQUEST FOR A LOAN: WHAT'S IN IT FOR US

Classified By: Ambassador Carol van Voorst for reasons 1.4 (b) and
(d).

1.(C) The brutally sudden collapse of the Icelandic banking system
earlier this month threatens severe economic hardship for the
citizens of this import-dependent economy. The government has
reached a tentative agreement with the IMF for a USD 2.1 billion
loan, but must raise an additional USD 4 billion from other sources
to conclude the arrangement. They have asked us to join what they
hope will be a consortium of lending countries by providing USD 1
billion. Despite the obvious hurdles - Iceland's status as a
developed European economy, the extent of its need, our own limited
resources - this request deserves the most careful consideration: we
have long-term national interests in the North Atlantic that a
negative response would jeopardize. These include:

2.(C)Iceland's strategic importance to U.S. security. Iceland has
hosted an important American military outpost since World War II.
During the years before we redeployed our forces in 2006, the U.S.
poured a quarter of a billion dollars annually into our base at
Keflavik. We turned the base over to Iceland's custody in September
2006, handing over responsibility to Iceland as NATO host nation for
maintaining the airport and long-range radar installations on behalf
of the alliance. In the subsequent two years, the Icelanders have
provided outstanding support to two large multination NATO exercises,
two U.S. naval visits, and several deployments of NATO air policing.
French, Norwegian, and U.S. fighters have shadowed Russian bombers
and fighter planes from Keflavik. Because the Icelandic government
has maintained the facilities at top-notch operational standards, the
base is immediately usable should circumstances warrant. A nation
crushed by economic depression cannot be the self-sufficient partner
we have spent decades and huge amounts of U.S. taxpayer dollars to
develop.

3.(C)A well-positioned friend in the High North. If the U.S. doesn't
help out Iceland when it is flattened by the worst financial crisis
in its history, we shouldn't expect the country to see it our way
when we ask - as we undoubtedly will -- for cooperation in furthering
our own security and economic aims in this increasingly vital region.
The NATO conference that Iceland is hosting to discuss High North
issues this coming January underlines the uncertain implications of
the environmental changes occurring in Iceland's North Atlantic
neighborhood. The melting Arctic ice means new trade routes and
increased competition for gas, petroleum, and other resources. The
Russians - who are discussing a loan with the Icelanders - have
already signaled their interest in exploring and exploiting Iceland's
potential undersea oil and gas fields. The Chinese - whom the
Icelanders are also approaching for a loan - will be big users of the
new sea lanes. Iceland may be small but it is valuable real estate in
a region that will only become more important to our economic welfare
and our national security. We want a firm friend and a stable ally.

4. (C) Clean energy partner and economic investment. Iceland is a
world leader in renewable energy and stands to play a significant
role in U.S. efforts to become energy independent. They have
know-how and enterprise and their experience in harnessing
geo-thermal energy is second to none. American firms are
capitalizing on Iceland's abundant clean energy and technical
expertise by investing close to USD 4 billion in the aluminum sector
here. We want Iceland to be in a position to attract foreign
investment and continue to develop its energy sector outreach. A
bankrupt economy would set our partnership back for years just when
we need Iceland's technical skills and entrepreneurial drive most.

5.(C) Iceland is reaching out with increasing desperation to any
available source of help as it confronts one of the most trying
crises in its history. Assistance from the U.S. at this crucial time
would be a prudent investment in our own national security and
economic well being. The Icelanders take fierce pride in their
flawless history of paying back their debt. Whatever the financial
turmoil and uncertainty of the moment, it's a good bet that this
economy of highly-educated, imaginative, and sophisticated people
will take off again. And when it does, and when the competition in
the High North really gets underway, it may be more important than we
can yet suppose to have the Icelanders remember us as the kind of
friend who stands by in fair weather and foul.


van Voorst

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