Iceland's economic troubles: Implications for the defense

C O N F I D E N T I A L REYKJAVIK 000264

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E.O. 12958: DECL: 10/29/2018
TAGS: MARR MOPS PREL NATO PGOV IC
SUBJECT: Iceland's economic troubles: Implications for the defense
and security sector
Classified by Ambassador Carol van Voorst for reasons 1.4(b) and (d).

1. (C) Summary: Iceland's economic collapse is spurring painful but
necessary cost cutting measures by the Icelandic government. One

expected target of reductions is the defense budget, a very small
part of the national budget but a line item with a high profile.
Although a funding reduction is not certain, Post anticipates a
reduction in the Icelandic Defense Department's budget and a
consequent reduction in the frequency of defense exercises and host
nation financial support for NATO air policing. Reductions in
Icelandic Coast Guard (ICG) operational tempo brought on by the
economic collapse will also likely negatively impact the country's
defense and security posture and will increase costs to nations
deploying to Iceland. End summary.


2. (C) The Icelandic government has had to ditch its planned 2009
budget because of the massive downturn in the economic and financial
situation of the country. Although we have not seen an economic
recovery "master plan" yet, the Icelandic government is prudently
forging ahead with consideration of internal cost cutting measures.
While budget estimates for FY2009 are still in flux, many voices both
within and outside government advocate for a reduction in the second
annual Icelandic defense budget, a tempting target for a parliament
not accustomed to having to fund defense.


3. (U) The very first Icelandic defense budget was enacted for the
2008 Icelandic fiscal year (January to December). At the then
current exchange rate the defense budget was approximately USD 20M;
USD 12M of which was budgeted for the operation of the Icelandic Air
Defense System (IADS) with the remaining money divided among exercise
and other operational requirements of the Icelandic Ministry for
Foreign Affairs Defense Department and its sub-directorate, the
Icelandic Defense Agency (IDA). (Note: The Defense Department
implements defense policy while the IDA executes that policy in the
form of operation of IADS, exercise planning, and managing
relationships within NATO and EUCOM.) Until the economic crash, the
expectation was that the level of 2009 defense spending would remain
more or less at this level, allowing all programs to continue as
planned.


4. (C) When a senior IDA official was asked by the resident EUCOM
LNO about his expectations for budget cuts, the official could not
offer any solid information, stating that his senior defense
leadership was waiting on direction from the senior executive level
within the MFA. He opined, however, that budget cuts were expected
but in an unknown amount, that a hiring freeze was in place, and,
although no layoffs were expected, there would be no new hiring to
replaced anyone who resigned or retired. He further indicated that
continued Icelandic sponsoring of the annual Northern Viking exercise
and NATO air policing missions - at least in their present form -
were very much points for discussion.


5. (SBU) The cornerstone of the Icelandic defense program is IADS.
Public statements by the Defense Director have been, not
surprisingly, in favor of continued funding, citing Iceland's role
within, and contribution to, the NATO integrated air defense system.
Since IADS is one program the Defense Agency can cite as adding real
world value to NATO operations, Post anticipates that the Defense
Agency will fight hard to sustain its funding. Other defense
programs, however, may suffer from budget cuts.


6. (C) Iceland envisioned NATO air policing deployments to occur
quarterly and thus far Denmark, France, and the US have fulfilled
this mission. The UK is scheduled to deploy to Iceland in December
-- bilateral political tensions notwithstanding -- with Denmark
recently agreeing to deploy here during the first quarter of 2009.
Up until now, Iceland paid for messing, berthing, and ground
transportation for visiting forces as well as ground handling for the
aircraft. These costs -- roughly $500,000 per deployment, or a total
of less than 2.25 percent of the MFA's entire 2008 budget -- are
small, but have a high political profile in a country that does not
have a standing military. Although Iceland's financial contribution
to NATO air policing is very small relative to the cost incurred by
the deployed forces, sources at the IDA and at Iceland's mission to
NATO tell Post that Iceland is likely to ask for a reduction to three
quarterly deployments vice four or, in the alternative, significantly
reduce or even eliminate its host nation logistic support.


7. (C) Two Northern Viking exercises have been conducted since the
closure of U.S. NAS Keflavik in 2006 and it has been Iceland's stated
objective (laid out in our Joint Understanding of 2006) to continue
the exercise on an annual basis. As with the NATO air policing














deployment, Iceland as host nation provides significant logistic
support for visiting forces, thus making the exercises a likely
target for budget reductions. Given the budget issues there has been
some discussion within the IDA of converting this annual event to a
biannual exercise.


8. (SBU) Although reporting to the Ministry of Justice, the
Icelandic Coast Guard (ICG) has a significant role to play when it
comes to defense and security issues in the High North. The current
economic issues--most especially the cost of fuel--have forced the
ICG to eliminate underway time for its two patrol vessels and its one
hydrographic vessel. These vessels have remained pier side for the
last six weeks. Fortunately, a local fuel supplier has agreed to a
deferred payment plan thus allowing one of the patrol craft to get
underway November 10 with the other patrol craft to follow shortly.


9. (C) Funding shortfalls have had an impact on ICG air operations
as well. The ICG's three search and rescue (SAR) helicopters and one
fixed wing aircraft remain grounded except for only those flights
necessary to maintain crew qualifications and for actual search and
rescue operations. Furthermore, two of the three helicopters are
leased from a Norwegian firm and the ICG has seen a 100 percent cost
increase since the beginning of the year (both fuel and lease costs).
Compounding this is the leasing company's threat to terminate the
leases and recall the helicopters due to the leasing company's
perception that the ICG lacks the financial ability to make the lease
payments - not to mention the ICG's actual problems with converting
the Icelandic krona and transferring the payment internationally, a
result of the collapse of Iceland's banking sector. These concerns
have more than just domestic implications: the ICG provides real
world SAR services for the Northern Viking exercises and NATO air
policing. If reduced funding translates into an inability to take on
this tasking, visiting forces will have to provide their own SAR
which, in turn, will dramatically increase the cost of their
deployments to Iceland.


10. (C) Comment: The Icelandic government is facing a financial and
social catastrophe, and the demands on its 2009 budget will be
severe. A huge government debt plus growing need for social services
as unemployment skyrockets will require the government to watch every
penny. We must expect budget reductions in defense spending that
will most likely impact Iceland's ability to host military exercises
or its financial support of NATO air policing deployments. Post is
coordinating with other NATO Allies here to encourage the government
to keep a long-term security perspective in mind as it looks for
places to trim the budget, and to look at the optional (exercises)
before the essential (IADS, air policing support).

VAN VOORST