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Cablegate: Icelandic Economic Crisis: Goi Reaches Agreement On Imf

VZCZCXRO5794
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHRK #0251 3011655
ZNR UUUUU ZZH
P 271655Z OCT 08
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 3864
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS REYKJAVIK 000251

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC ECONOMIC CRISIS: GOI REACHES AGREEMENT ON IMF
PACKAGE OF 2 BILLION

1. (U) The Icelandic Prime Minister, Foreign Minister and visiting
IMF team held consecutive press conferences on October 24 to announce
an agreement on an IMF package encompassing a roughly $2 billion IMF
loan to Iceland.

2. (U) Prime Minister Haarde and Foreign Minister Gisladottir
announced that the Icelandic Government had approved a decision to
formally request IMF assistance, and the opposition political parties
had been briefed on this. Iceland will take a 2 billion USD loan
from the IMF to be paid back between 2012 and 2015. The hope is that
the IMF package will help open other lines of credit to meet the
immediate goal of 6 billion USD. They said that the Russian loan is
still a possibility in this framework, but the amount will likely be
lower than the 4 billion Euro initially discussed. There are no
current plans to raise taxes to meet the debt, but this can't be
ruled out. Haarde said he expected the next six months to be "very
difficult." Iceland views the dispute with the UK government and the
IMF package as two separate issues. This loan will not be used to
pay off debts of the collapsed banks -- the government will not take
public debt to meet private obligations. The PM noted that he alone
has power to appoint and fire Central Bank Governors and that he has
no plans to make changes to the board at present.

3. (U) IMF Delegation led by Paul Thomassen announced that the hope
that the IMF Board will approve the 2 billion USD loan package within
the next ten days, which would make 800 million USD available
immediately. This infusion of cash will allow Iceland to start
foreign trading of the Krona again, and hopefully mitigate a "flight
of capital" and a sharp depreciation of the Krona. The IMF expects a
recession next year of approximately ten percent of Iceland's GDP,
but admitted this is a very uncertain figure. Inflation will spike
at first, but should drop to 4.5 percent by end of 2009. The
Iceland-UK agreement on IceSave deposits was not a prerequisite for
the IMF package, but ongoing talks between Iceland-UK and
Iceland-Holland on bank deposits are part of approach that IMF
expects to GOI to follow to ensure long term financial stability.

4. (U) Post emailed a copy of the IMF press release to the desk.

VAN VOORST

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