VZCZCXRO5325
OO RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHRK #0020/01 0261815
ZNR UUUUU ZZH
O 261815Z JAN 09
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3963
RHEHAAA/WHITEHOUSE WASHDC IMMEDIATE
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEAIIA/CIA WASHDC
RUEKDIA/DIA WASHDC

UNCLAS SECTION 01 OF 02 REYKJAVIK 000020 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EUR/NB, INR-B 
OSLO FOR DATT 
DOD FOR OSD-P (FENTON) 
TREASURY FOR LAWRENCE NORTON AND ERIC MEYER 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON IC
SUBJECT: ICELAND: GOVERNMENT FALLS, UNITY COALITION IN THE OFFING? 
 
Refs: A) Reykjavik 012 
  B) Reykjavik 013 
  C) Reykjavik 015 
  D) Reykjavik 017 
 
¶1. (U) Summary:  Despite a weekend of frantic efforts by the leaders 
of Iceland's governing coalition to bring their parties to heel, 
Prime Minister Haarde announced January 26 that the governing 
coalition has fallen apart less than two years into its term.  The 
immediate cause was the demand of the junior party, the Social 
Democratic Alliance, that the Haarde's Independence Party (IP) yield 
the Prime Minister's seat and make other concessions.  While Haarde 
wants to establish a unity government with the IP at the head, there 
is considerable doubt that he will be successful.  President 
Grimsson will meet with the heads of all the parties prior to giving 
one the mandate to form a coalition.  Many expect the SDA to be 
tapped.  Early parliamentary elections are expected.  End Summary. 
 
A Last-Ditch Effort Fails 
------------------------- 
 
¶2.  (U) After Prime Minister Geir Haarde's dramatic announcement on 
January 23 that he has been diagnosed with cancer and that his 
Independence Party would call for early elections in May (ref D), 
the stage was set for a weekend of furious negotiation between the 
heads of the governing coalition.  Haarde held several meetings over 
the course of the weekend with Social Democratic Alliance Chair and 
Foreign Minister Ingibjorg Solrun Gisladottir to discuss the future 
of the government.  Adding to the drama, on January 25 Minister of 
Commerce Bjorgvin Sigurdsson (SDA) announced his resignation as well 
as that of the entire board of the Financial Supervisory Authority 
(FME).  Sigurdsson said he hoped to take some responsibility for the 
banking collapse, while also pointedly suggesting that the Board of 
the Central Bank should consider doing the same. 
 
¶3.  (SBU) On January 26, the IP and SDA chairs met with their 
respective parliamentary caucuses to brief on the weekend's 
negotiations.  The rumored outlines of the SDA's offer: in order to 
keep the coalition alive, the IP needed to fire Central Bank 
Chairman David Oddsson and the rest of the Board; agree to spring 
elections; and yield the Prime Ministry to an SDA designee.  By most 
accounts, the third point was a bridge too far:  the Political 
Advisor to the Minister of Finance (IP) told PolOff that his boss 
went into today's meeting willing to yield on the other requests, 
but that the IP would rather walk than surrender the Prime 
Minister's seat to its junior partner. 
 
¶4.  (U) Just after midday, PM Haarde announced to waiting press that 
the Independence Party had been unable to agree to the SDA's 
demands, and that the coalition would dissolve.  While thanking SDA 
Chair Gisladottir for her warm and honorable collaboration over the 
last two years, Haarde had harsh words for the SDA and its "lack of 
courage" to press forward with the coalition.  He added that the SDA 
demand for the Prime Ministry was a nonstarter and that it should 
have been obvious to the SDA that this would never be accepted. 
Referring to the urgent work awaiting the government as it 
implements the International Monetary Fund's recovery program (ref 
C), Haarde said he hoped to assemble a unity government under IP 
leadership. 
 
¶5.  (U) Haarde met with Icelandic President Olafur Ragnar Grimsson 
at day's end to formally relinquish his mandate to form a 
government.  Grimsson will now meet with the heads of the country's 
other political parties, after which he will give one party the 
mandate to assemble a coalition.  Many expect that he will choose 
Gisladottir's SDA, given Grimsson's previous political career in one 
of the parties that combined to form the SDA. 
 
What government next? 
--------------------- 
 
¶6.  (SBU) Iceland will without a doubt see parliamentary elections 
in the coming months, two years ahead of schedule.  The opposition 
parties, surging in polls as a result of popular displeasure with 
the government, will want to lock in their gains at the ballot box, 
and the outgoing government parties will want a chance to present a 
new face to the public.  However, in the interim a caretaker 
government will most likely be established, and two possibilities 
are getting the most discussion:  a unity government with all five 
parties in the Althingi, and a leftist minority government with the 
 
REYKJAVIK 00000020  002 OF 002 
 
 
pledged support of the Progressive Party. 
 
¶7.  (SBU) On first reading, a unity government seems more likely, 
given that all parties have now stated their desire for one. 
However, such an agreement may be unattainable due to severe policy 
conflicts between the IP and the Left-Greens.  The Left-Greens (and 
others) would be likely to object to a unity government under IP 
leadership, given the current discontent with the government. 
Beyond that, however, the Deputy Chair of the Left Green Movement 
told PolOff just before the government fell that the Greens would 
not come into government "just to be there.  We have policy concerns 
that we want to see addressed," such as renegotiation or outright 
cancellation of the IMF loan and changes to the tax structure for 
corporations and individuals.  IP stalwarts such as a leading 
investment banker have told EconOff that these moves are exactly 
what the IP -- and the broader business community -- fear.  Such 
basic conflicts may make it impossible for the IP and the 
Left-Greens to be in the same government, even a caretaker unity 
government. 
 
¶8.  (SBU) A minority coalition between the Left-Greens and the SDA 
would also pose problems.  Though the new Progressive Party (PP) 
chair has pledged to support such a minority coalition, the three 
parties disagree on a number of issues (such as EU membership).  The 
SDA has also been a strong backer of the IMF bailout plan, which 
could hinder SDA-LG cooperation just as it would a unity 
government. 
 
¶9.  (SBU) COMMENT:  Despite the unclear political situation and 
limited options for a new coalition, all parties agree that there is 
little room for delay.  The Left-Greens want elections earlier than 
all other parties, but all want to vote sooner than later.  We 
expect that a caretaker coalition, if there is to be one, will be 
announced in the next few days, and will carry with it a date for 
spring elections.  Failing that, we expect President Grimsson to 
announce the Althingi's dissolution and elections to follow within 
45 days, as specified by the constitution. 
 
VAN VOORST