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Cablegate: Looking for Alternatives to an Icesave Referendum

VZCZCXRO7199
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHRK #0013/01 0131718
ZNY CCCCC ZZH
P 131718Z JAN 10
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 4271
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 REYKJAVIK 000013

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

REYKJAVIK 00000013 002 OF 002


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

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