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