Cablegate: Icelandic Economic Crisis, Time for Usg to Get Involved?

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TO RUEHC/SECSTATE WASHDC IMMEDIATE 3835
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RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 REYKJAVIK 000225

SIPDIS

STATE FOR EUR/FO A/S Dan Fried

E.O. 12958: DECL: 10/07/2018
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC ECONOMIC CRISIS, TIME FOR USG TO GET INVOLVED?

REF: Reykjavik 223

Classified By: DCM Neil Klopfenstein for reasons 1.4 (b) and (d).

1.(C) Summary: The Icelandic economic crisis continues with no end
in sight. The possibility of a Russian loan bailout as well as
concerns voiced by some American bankers raise the question of
whether greater USG involvement in the crisis is merited. The
Icelandic Central Bank announced this morning that its attempts to
peg the krona to an index were not working and it would no longer fix
the rate. The krona devalued, then stabilized later in the day, but
there are significant differences in the exchange rate depending on
the financial institution. The Financial Supervisory Authority used
the powers from emergency legislation to take control of Glitnir Bank
and the takeover went well. Kaupthing remains independent for now;
their Swedish branch will receive a 700 million USD loan from the
Swedish Central Bank. Relations with Britain are under strain
following UK Chancellor Darling's announcement that he seized the UK
assets of Icelandic banks, and the media reported that PM Brown wants
to sue the Icelandic government to refund British depositors. Prime
Minister Haarde stressed in a press conference at 4 pm that the
current situation would not affect many decades of friendship between
Iceland and the UK. Haarde said he had talked to his colleagues in
the Nordics and that the Norwegian Prime Minister had offered
Norwegian assistance. Regarding the Russian loan offer, the PM asked
at the press conference why Iceland shouldn't call on the Russians if
they could help? Despite public assertions that some of Iceland's
friends had failed to provide help, the Embassy does not believe the
Icelanders have adequately checked out all possibilities of
cooperation with U.S. entities. We urged Iceland reps to reach out
to U.S. authorities immediately so that "our friends said no" - means
they really asked the right questions. End Summary.

2. (U) The Central Bank announced that the fixed rate for the krona
was not holding and they would no longer hold the rate. The krona
devalued a bit, and then stabilized at the end of the day. We
noticed that the exchange rate varies from institution to
institution, which less confidence in the krona abroad. The Central
Bank rate is 114 ISK/USD, Kaupthing's rate is 96.7 ISK/USD and UBS (a
Swiss bank)'s rate is 271 ISK/USD. Today Landsbanki lowered its
daily foreign currency withdrawal limits from 200,000 ISK to just
50,000 ISK.

3. (U) The Financial Supervisory Authority (FME) took control of
Glitnir Bank last night. The FME has replaced the board of directors
and promised similar action as has been taken at Landsbanki. The
Minister of Commerce reported at a press conference at 4 pm that the
takeover was smooth and had gone well. The only bank of the largest
three to remain independent, Kaupthing, announced that their Swedish
unit was receiving a 5 billion Swedish krona, or 700 million USD,
loan from the Swedish Central Bank.

4. (C) The Director General of the Economic Department of the
Ministry of Finance, Thorsteinn Thorgeirsson, told Econoff he was
very concerned with the deteriorating situation with the British. He
pointed to the media reports that Prime Minister Gordon Brown wanted
to sue Iceland over guaranteeing British deposits in Icelandic banks
in the UK and UK Chancellor Darling's televised speech on the
Parliament floor stating that he had seized and frozen assets of
Icelandic banks in UK. In his 4 pm press conference today, Prime
Minister Haarde stated that the Icelandic Government will work with
the British government to find a solution to ensure the British
deposits in the Icelandic accounts IceSave are safe. Haarde added
the current situation would not affect many decades of friendship
with the UK.

5. (C) In reaction to Icelandic government assertions yesterday that
the Icelanders were turning to Russia because friends (i.e., the
U.S.) had failed to respond to pleas for help, the Embassy checked
with both Icelandic and U.S. institutions to ascertain whether the
Icelanders had requested help or advice from other than the Federal
Reserve. We have only been able to confirm that Central Bank
officials have talked to the Chairman of the New York Fed - but not
since last week -- and, as Treasury briefed the ambassador on October
6, U/S McCormack phoned the Finance Minister that day. We are at a
loss to explain why the Icelanders have not picked up the phone to
discuss what they need and what we might be able to help them with,
though the stature of Central Bank director David Oddsson may have
something to do with a reluctance to open other lines of
communication. American bankers here tell us that U.S. support is
badly needed, that the Icelandic bank assets are not toxic, and that
their problem is short term liquidity worsened by a crisis of
confidence.

6. (C) The U.S. has strategic interests in the high north and a
sturdy security relationship with post-Keflavik Iceland that both
sides have labored to develop. Today the Embassy urged senior reps
in the PM's office and elsewhere to at least explore what
confidence-building cooperation (other than the credit swaps the Fed
turned down) may be possible to develop. We doubt that it would be

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in the interest of the U.S. or NATO for the Icelanders to be beholden
to Russia, however "friendly" the loan terms may be.

VAN VOORST

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