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PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHRK #0058/01 0771727
ZNR UUUUU ZZH
P 181727Z MAR 09
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 4028
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 REYKJAVIK 000058 
 
STATE FOR EUR/NB 
TREASURY FOR ERIC MEYER AND LARRY NORTON 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: PGOV ECON EFIN IC
SUBJECT:  ICELAND SCENESTTER FOR TREASURY DAS ERIC MEYER'S VISIT 
 
¶1. (SBU) Summary:  Since your previous visit three months ago, 
you'll find many changes in Iceland's economic and political 
landscape.  Businesses are hurting and unemployment has risen to an 
unprecedented ten percent.  Currency restrictions imposed in 
December were extended another six months until September 1.  News 
is not good on aluminum and fish, the two export-oriented pillars 
that are helping to prop up the ISK.  Following the escalating 
protests in January, the government fell and a leftist coalition was 
established.  Consequently, you'll be meeting a few new faces at the 
Ministries of Finance and Business Affairs and the Central Bank.  As 
the IMF team found during their recent visit, the political turmoil 
has delayed dealing with crucial issues like resolving IceSave 
account guarantees.  Pressure is rising on the Central Bank to lower 
interest rates, while the public's desire for EU membership and Euro 
adoption has deflated somewhat, with only the business community 
strongly advocating this move.  The parties in the interim coalition 
government are acting cautiously, knowing their actions today 
directly affect whether they will be elected in general elections 
slated for April 25.  The vital question of how the Icelandic 
economy will adapt to the new global economic realities remains 
unclear.  End Summary. 
 
¶2. (SBU) The economic situation in Iceland has visibly deteriorated 
since December.  Unemployment is currently at 10.3 percent, a 
dramatic rise from under two percent just five months ago.  When you 
were last in Iceland, there were anecdotal claims that up to 70 
percent of businesses were technically insolvent because the 
depreciating ISK had ballooned their foreign currency loan payments. 
 That has proven to be the case.  In addition to vacant construction 
sites with half-finished projects, a walk down the main shopping 
street in Reykjavik reveals newly vacant storefronts from failed 
businesses or desperate posters for final sales.  Other signs of the 
hard times include Baugur, one of the biggest holding companies in 
Iceland, declaring bankruptcy and the Financial Supervisory 
Authority's takeover of investment bank Straumur-Burdaras on March 
¶9.  The temporary capital controls that expired March 1 were 
extended an additional six months.  The ISK is being helped by a 
small trade surplus, although the two main pillars for exports, 
aluminum and fish, have suffered in the global downturn.  Worldwide 
aluminum demand has dropped, and the resulting price decreases have 
slowed production at the country's smelters.  The reduced demand for 
fish has fisherman storing their catch; we hear reports that the 
freezer capacity is nearly maxed out. 
 
¶3. (SBU) The public discontent over the economic situation and the 
government's apparent lack of action led to a series of escalating 
public protests.  As a result, the centrist government fell in 
January, and a leftist interim coalition was put in place.  The most 
relevant Cabinet changes to your visit are the new Minister (and 
Permanent Secretary) at the Ministry of Finance, a new Minister of 
Business Affairs, and a new Prime Minister.  Minister of Business 
Affairs Gylfi Magnusson, whom you will meet, is a non-political 
academic educated at Yale.  Upon installation of the new government, 
the Central Bank leadership structure was changed which resulted in 
the hire of a Norwegian interim Bank Director.  The Board at the 
Financial Supervisory Authority was also changed, with another 
academic appointed as Chair. 
 
¶4. (SBU) As the IMF team found during their two-week visit that 
ended last week, the political turmoil has delayed dealing with 
crucial issues like resolving the dispute with the UK and other EU 
countries over deposit guarantees for the IceSave accounts.  The 
interim coalition is acting cautiously, knowing their actions today 
and the public perception of those actions will directly affect the 
outcome of the April 25 general elections.  Inconclusive public 
opinion polls have given the parties little ground to feel 
confident, and they are watching every move carefully.  As an 
example, one of the first acts of the new Minister of Health was to 
reverse the unpopular cost-cutting decision of his predecessor to 
close a small hospital, despite the fact that his Ministry is under 
the gun to make nearly ISK 7 billion ($60 million) in budget cuts. 
There is pressure on the Central Bank to lower the prime index rate. 
 However, public calls to join the EU and adopt the Euro are not as 
intense as in October.  Only the business sector continues to 
advocate this position; the latest poll indicated 54.5 percent of 
the general public were against joining the EU. 
 
¶5. (SBU) The change in government has also loosened tongues and 
you'll find many interlocutors are offering details of the situation 
leading up to the banks collapse.   The government was criticized 
for not investigating criminal activities within the banks and the 
international corporations, and as a response French-Norwegian 
anti-corruption crusader Eva Joly has been hired as a special 
government consultant for the investigation of economic crimes. 
Mysterious leaks to the media of the banks' loan books are revealing 
that the banks' owners were manipulating their stock prices and that 
the quality of loans (previously touted as sound) deteriorated 
 
REYKJAVIK 00000058  002 OF 002 
 
 
before the collapse. 
 
¶6. (SBU) Comment:  Installing new experts in key positions such as 
the Central Bank, the Financial Supervisory Authority and some 
ministries, is positive and will provide needed expertise.  However, 
given that the interim government is acutely aware of the impending 
April 25 general elections, it is unclear how much progress will be 
made before a new government is installed.  The vital question of 
how the Icelandic economy will adapt to the new global economic 
realities remains unclear.  End Comment. 
 
 
 
VAN VOORST