VZCZCXRO1086
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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
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
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UNCLAS SECTION 01 OF 02 REYKJAVIK 000003 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR NORTON 
NSC FOR HOVENIER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN IC NE PGOV PREL UK
SUBJECT: PRESIDENT REJECTS ICESAVE BILL 
 
REF: A. REYKJAVIK 228 
     ¶B. REYKJAVIK 218 
     ¶C. REYKJAVIK 146 
 
REYKJAVIK 00000003  001.2 OF 002 
 
 
¶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 
 
REYKJAVIK 00000003  002.2 OF 002 
 
 
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