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Cablegate: President Rejects Icesave Bill

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DE RUEHRK #0003/01 0051715
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P 051715Z JAN 10
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 4251
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TAGS: ECON EFIN IC NE PGOV PREL UK
SUBJECT: PRESIDENT REJECTS ICESAVE BILL

REF: A. REYKJAVIK 228
B. REYKJAVIK 218
C. REYKJAVIK 146

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1. (U) Summary: President Olafur Ragnar Grimsson announced on
January 5 that he will not sign into law the Icesave bill
passed by parliament on December 30, but will refer the bill
to a national referendum. This decision throws Iceland's
political and economic future into complete uncertainty,
leaving politicians and pundits alike wondering what happens
next. End summary.

President Sends Issue to National Referendum
--------------------------------------------- --
2. (U) The President of Iceland, Olafur Ragnar Grimsson,
announced at a press conference on January 5 that he has
decided not to sign the Icesave legislation passed by the
parliament on December 30. This decision sends the Icesave
issue to a national referendum where it is widely expected to
fail. The President cited a petition, signed by nearly
one-quarter of the electorate, and public opinion polls as
the basis for his decision. "It has steadily become more
apparent that the people must be convinced that they
themselves determine the future course. The involvement of
the whole nation in the final decision is therefore the
prerequisite for a successful solution, reconciliation and
recovery," said the President.

3. (SBU) The constitution is vague regarding when a
referendum must take place, saying only that it should occur
"as soon as circumstances permit." Emboff spoke with Dr.
Ragnhildur Helgadottir, a constitutional lawyer and an
advisor to the Icelandic parliament, who said that
legislation legalizing a national referendum must pass before
the referendum itself can occur. There are currently two
bills in the parliament, both of which have gone through the
first round of discussions, that address the mechanics of
holding a national referendum. One bill was initiated by the
Prime Minister and the other by the political party called
The Movement. Both of these bills suggest that a referendum
should take place within two months after a President rejects
signing a bill into law. Helgadottir said that it is highly
likely the parliament, which is currently on vacation, will
reconvene shortly and further discuss these two bills, as
legislation must be passed before the country can conduct a
national referendum.

4. (SBU) Should a national referendum reject the Icesave
bill, or should the bill be withdrawn before a referendum can
occur, the previous legislation passed in August will remain
in force (reftel C). That law, although it guaranteed
Iceland's repayment of its debts, was unacceptable to the
British and Dutch governments because it contained troubling
amendments such as an end date for repayment regardless of
whether the debts were paid in full. In a meeting for the
diplomatic corps on January 5, officials at the MFA said that
even if a referendum rejects the current Icesave bill,
Iceland has still pledged to meet its international
obligations via the August law. They seemed to be indicating
that Iceland would stand behind the previous bill with the
hope that the British and Dutch might now find it acceptable
in light of recent developments.

Political Fallout
-----------------
5. (U) Prime Minister Johanna Sigurdardottir addressed the
media shortly after the President's statement and said that
his decision came as a complete surprise to the government.
Sigurdardottir stated that the government was extremely
disappointed with the decision of the President not to sign
the Icesave bill into law, saying that he has placed the
rebuilding of Iceland's economy and international reputation
into turmoil. The PM questioned whether it was right for the
President to be involved in an issue such as Icesave, as it
was first and foremost a bilateral issue between the GOI and
the British and Dutch governments. (Note: the President's
role is largely ceremonial. End note.) Many members of
parliament and analysts had previously predicted that the
government would resign if its decision was overturned and
the Icesave matter went to a national referendum. When asked
if the coalition would resign, however, the PM would neither
confirm nor exclude the possibility. The PM ended the press
conference by saying that the parliamentary groups of the
ruling coalition would meet later in the day to review the
situation.

6. (U) The President's decision also casts serious doubts on

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Iceland's application to join the European Union. Several
experts have posited that the British and Dutch may now block
Iceland's application in retaliation for this decision.
Baldur Thorhallsson, a professor who is considered one of the
country's foremost experts on Iceland's EU candidacy, told
Emboff that the UK and the Netherlands are almost certain to
block Iceland's efforts to join the EU unless a compromise is
reached over Icesave. Prior to this development, the EU
Commission was widely expected to endorse Iceland's candidacy
and negotiations were expected to begin shortly after the
next EU summit in March. In the meeting with the diplomatic
corps, the MFA, on the other hand, stressed that Iceland's EU
application and the Icesave issue are not and should not be
linked.

Economic Fallout
----------------
7. (SBU) The President's decision is expected to have
substantial economic implications and further delay Iceland's
already stunted economic recovery. The $2.1 billion IMF
program, created under the assumption that the Icesave bill
would pass and the country would have access to the $2.5
billion loan from the Nordic countries, will require
significant reworking (reftel B). An IMF employee told
Emboff that the IMF does not intend to issue an immediate
statement and that nothing may be forthcoming for several
days. The credit agencies are also expected to downgrade
Iceland to junk status, further limiting the country's
efforts to regularize international financial flows.

8. (U) PM Sigurdardottir, in response to the President's
announcement, stated that uncertainty regarding financial
commitments to other countries could have serious, damaging
consequences for the Icelandic nation. Both she and the
Finance Minister stated that the government wants to prevent
Iceland from obtaining the reputation of a country that does
not fulfill its commitments. Her office shortly thereafter
released a statement saying that "the government of Iceland
remains fully committed to implementing the bilateral loan
agreements and thus the state guarantee provided for by the
law."

Comment
-------
9. (SBU) The President's decision, and the manner in which he
delivered it, highlight the deep divisions impeding the
efficacy of the Icelandic government. Despite meeting with
government leaders on Sunday to discuss the matter, the
members of the ruling coalition only learned of the
President's decision from watching the press conference. The
Prime Minister and Finance Minister recognize the importance
of maintaining international political and financial
relationships, yet their credibility has now suffered a
serious blow as they scramble to do damage control. It is
too soon to tell how the dust will settle; however, concerns
regarding the viability of the current government, the
country's EU application, and Iceland's economic recovery are
all valid. End comment.
EAGEN

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