ICELAND'S REQUEST FOR A LOAN: WHAT'S IN IT FOR US

C O N F I D E N T I A L REYKJAVIK 000255 SIPDIS STATE FOR EUR/FO A/S FRIED; TREASURY FOR A/S LOWERY E.O. 12958: DECL: 10/29/2018 TAGS: EFIN ECON PGOV IC SUBJECT: ICELAND'S REQUEST FOR A LOAN: WHAT'S IN IT FOR US Classified By: Ambassador Carol van Voorst for reasons 1.4 (b) and (d). 1.(C) The brutally sudden collapse of the Icelandic banking system earlier this month threatens severe economic hardship for the citizens of this import-dependent economy. The government has reached a tentative agreement with the IMF for a USD 2.1 billion loan, but must raise an additional USD 4 billion from other sources to conclude the arrangement. They have asked us to join what they hope will be a consortium of lending countries by providing USD 1 billion. Despite the obvious hurdles - Iceland's status as a developed European economy, the extent of its need, our own limited resources - this request deserves the most careful consideration: we have long-term national interests in the North Atlantic that a negative response would jeopardize. These include: 2.(C)Iceland's strategic importance to U.S. security. Iceland has hosted an important American military outpost since World War II. During the years before we redeployed our forces in 2006, the U.S. poured a quarter of a billion dollars annually into our base at Keflavik. We turned the base over to Iceland's custody in September 2006, handing over responsibility to Iceland as NATO host nation for maintaining the airport and long-range radar installations on behalf of the alliance. In the subsequent two years, the Icelanders have provided outstanding support to two large multination NATO exercises, two U.S. naval visits, and several deployments of NATO air policing. French, Norwegian, and U.S. fighters have shadowed Russian bombers and fighter planes from Keflavik. Because the Icelandic government has maintained the facilities at top-notch operational standards, the base is immediately usable should circumstances warrant. A nation crushed by economic depression cannot be the self-sufficient partner we have spent decades and huge amounts of U.S. taxpayer dollars to develop. 3.(C)A well-positioned friend in the High North. If the U.S. doesn't help out Iceland when it is flattened by the worst financial crisis in its history, we shouldn't expect the country to see it our way when we ask - as we undoubtedly will -- for cooperation in furthering our own security and economic aims in this increasingly vital region. The NATO conference that Iceland is hosting to discuss High North issues this coming January underlines the uncertain implications of the environmental changes occurring in Iceland's North Atlantic neighborhood. The melting Arctic ice means new trade routes and increased competition for gas, petroleum, and other resources. The Russians - who are discussing a loan with the Icelanders - have already signaled their interest in exploring and exploiting Iceland's potential undersea oil and gas fields. The Chinese - whom the Icelanders are also approaching for a loan - will be big users of the new sea lanes. Iceland may be small but it is valuable real estate in a region that will only become more important to our economic welfare and our national security. We want a firm friend and a stable ally. ¶4. (C) Clean energy partner and economic investment. Iceland is a world leader in renewable energy and stands to play a significant role in U.S. efforts to become energy independent. They have know-how and enterprise and their experience in harnessing geo-thermal energy is second to none. American firms are capitalizing on Iceland's abundant clean energy and technical expertise by investing close to USD 4 billion in the aluminum sector here. We want Iceland to be in a position to attract foreign investment and continue to develop its energy sector outreach. A bankrupt economy would set our partnership back for years just when we need Iceland's technical skills and entrepreneurial drive most. 5.(C) Iceland is reaching out with increasing desperation to any available source of help as it confronts one of the most trying crises in its history. Assistance from the U.S. at this crucial time would be a prudent investment in our own national security and economic well being. The Icelanders take fierce pride in their flawless history of paying back their debt. Whatever the financial turmoil and uncertainty of the moment, it's a good bet that this economy of highly-educated, imaginative, and sophisticated people will take off again. And when it does, and when the competition in the High North really gets underway, it may be more important than we can yet suppose to have the Icelanders remember us as the kind of friend who stands by in fair weather and foul. van Voorst