ICELANDIC ECONOMIC CRISIS: GOI - UK NEGOTIATIONS ON ICESAVE

C O N F I D E N T I A L REYKJAVIK 000246

SIPDIS

STATE FOR EUR/FO A/S Dan Fried

E.O. 12958: DECL: 10/22/2018
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC ECONOMIC CRISIS: GOI - UK NEGOTIATIONS ON ICESAVE
ACCOUNTS GO BADLY

Classified By: Economic Section Chief Fiona Evans for reasons 1.4 (b)
and (d).

1.(C) Ministry for Foreign Affairs External Trade Director Martin
Eyjolfsson bleakly described for Ambassador and EconOff the
difficult, ongoing negotiations with the British delegation over the
obligation and repayment connected with the Icelandic IceSave
accounts in the U.K. Eyjolfsson said the British government sent a
"technical delegation" to negotiate; the team consists of Finance
Ministry and the Bank of England officials, but no diplomatic
representatives. He said the lack of diplomatic presence has made it
difficult for the British team to appreciate the full effects of the
British authorities' actions in seizing Icelandic assets under
terrorism legislation. Eyjolfsson said, "If the U.K. had seized
France's sovereign gold reserves like they had Iceland's, a war
between France and the U.K. would have broken out by now." (Note:
Featured in the Icelandic media today is the online petition
"Icelanders Are Not Terrorists," (www.indefense.is) which is
collecting photographs and signatures to send to PM Gordon Brown
protesting the seizure of Icelandic assets under the terrorism law.
End Note.)


2. (C) According to Eyjolfsson, the Icelanders are arguing over both
the principle and the terms of an agreement. Eyjolfsson asserted
that the EU Directive concerning bank funded insurance was not
designed for a systemic meltdown and that the obligations of the
state in such circumstances were not crystal clear. He said the
Icelanders want to take this issue before the European Court of
Justice, but the British team refused. Eyjolfsson said he told the
Brits it would be impossible politically for the government to sell
their proposals to Parliament or the electorate. He said that since
there is no diplomatic element to the delegation that this argument
had no traction. Eyjolfsson said the only concern of the UK is "to
nail down the terms of a loan so they can get their money." He
mentioned that the Brits had tossed out the figure of 13.5 percent
interest, but the Icelanders offered 6 percent. The Icelanders had
asked for a twenty year term but the Brits countered with a ten year
term. Eyjolfsson said even if they come to a deal, they will still
need approval by the Icelandic Parliament. He noted that the Dutch
agreement signed last week had only been initialed as an MOU and that
also faced parliamentary approval.


3. (C) Eyjolfsson said that the Icelandic public needs time to absorb
the enormity of the crisis. No one really fathoms yet that the
government is going to go from ten percent of GDP as debt to 140
percent. He illustrated that each Icelandic household would have to
pay at least 500 USD every month - a fifth of their household income
- for the next ten years just to service the interest of a loan to
pay off the IceSave accounts. The IMF loan would come on top of this
debt burden. Eyjolfsson was emotional as he described some of the
dire economic forecasts and said he just could not see how this was
going to end or how the future of his young children could be
ensured. He, as have others recently, predicted a mass emigration of
talent from the country as the best and brightest will refuse to
spend their lives under the burden of paying off the national debt.


4. (C) Comment: Eyjolfsson's unusually frank and open discussion of
ongoing negotiations with the UK team are just one indication of how
unusual and desperate is the situation here. The enormity of the
debt and the responsibility of the Icelanders are not well understood
by many here. Many of those who do understand are near despair.


VAN VOORST