ICELANDIC ECONOMIC CRISIS: THIRD BANK GOES DOWN AS MASS

C O N F I D E N T I A L REYKJAVIK 000227

SIPDIS

STATE FOR EUR/FO

E.O. 12958: DECL: 10/07/2018
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC ECONOMIC CRISIS: THIRD BANK GOES DOWN AS MASS
FIRINGS START

REF: Reykjavik 223

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

1.(C) Summary: The Icelandic economic crisis worsened as the
last(and largest) of the big three banks, Kaupthing, was taken over
by the Icelandic government; the Icelandic stock exchange was shut
down until Monday; one-third of Landsbanki employees were fired; and
two new entities were created to take over domestic operations of the
former Landsbanki and Glitnir banks. The possibility of a Russian
loan continues to generate GOI assertions that finances and foreign
policy can be kept separate. The Prime Minister stated that the
Icelandic government had not asked for a loan from the IMF, but
discussions continue in Reykjavik. The Minister of Finance travels
to Washington today, and his meeting at the U.S. Treasury Friday will
be important in focusing the Icelanders on a viable way through this
disaster. End Summary.


2. (SBU) The Chairman of Kaupthing Bank's Board, Sigurdur Einarsson,
blamed British authorities for Iceland's Financial Supervisory
Authority (FME) take over of Kaupthing in the early hours of October

9. The FME, which used the new emergency legislation authority,
asserted that the takeover will insure continued commercial bank
operations in Iceland and that Kaupthing's domestic deposits are
fully guaranteed. Einarsson said the British authorities' October 8
seizure of Kaupthing Edge deposit accounts valued at 3 billion
pounds, and the forced suspension of payments of Kaupthing's
subsidiary in London, had been interpreted as a technical default on
loans by Kaupthing's creditors. The British apparently invoked
anti-terrorism laws created in the aftermath of 9/11 to freeze
Icelandic assets in the UK. The Icelandic media is reporting that UK
Chancellor Darling took this action after a miscommunication with
Minister of Finance Arni Mathiesen over whether Landsbanki's IceSave
accounts in the UK would be guaranteed by the Icelandic authorities.
The association with terrorism has infuriated Icelandic authorities.


3. (SBU) Iceland closed its stock exchange this morning. An official
statement from the OMS Stock Exchange said, "Due to unusual market
conditions NASDAQ OMX Iceland has decided to suspend temporarily
trading on its equity markets. The equity markets will re-open for
trading on Monday, October 13."


4. (SBU) Despite assurances yesterday by the Minister of Commerce and
the Minister of Finance that bank employees would not lose their
jobs, Landsbanki fired one-third of its employees today. This will
likely impact the unemployment rate by close to half a percentage
point. The FME created two new bank entities "New Landsbanki Island,
hf" and "New Glitnir Bank, hf" to conduct the domestic operations of
their predecessor banks.


5. (C) The Russian loan is still part of Iceland's plan. Prime
Minister Haarde said last night that the loans from the IMF and
Russia "are not mutually exclusive" though the government had not
asked IMF for a standby loan or an economic program. He repeated
that statement in a press conference today. Questions about the
influence the loan might give Russia continue to be met by assertions
that finances and foreign policy can and will be kept separate.


6. (C) Minister of Finance Arni Mathiesen travels to Washington
tonight for World Bank meetings. Post persuaded the Minister to
agree to meet with senior Treasury officials while in the U.S.
Mathiesen will meet with Treasury A/S Clay Lowery on October 10. We
would hope this meeting will help the Icelanders think their way
through the present crisis and move from a stopgap reactive approach
to a durable comprehensive plan. It should also make clear to them
how the U.S. can and cannot be of assistance and point them in the
direction of other options.

van Voorst