ICELAND: MFA SLASHES BUDGET, WILL REPLACE AMBASSADOR TO

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SUBJECT: ICELAND: MFA SLASHES BUDGET, WILL REPLACE AMBASSADOR TO
U.S. AS PART OF RESHUFFLE


1. (SBU) Summary: Iceland's Foreign Minister has announced a twenty
percent reduction in the Ministry's budget for FY 2009. Four
Icelandic missions will be closed down and the positions of six
Ambassadors, who are retiring, will not be filled. Some Icelandic
foreign service staff at overseas posts will be moved back to
Reykjavik, and nonessential travel has been frozen. Iceland's
international aid contribution will be reduced drastically and the
newly established defense budget will be slashed, though MFA
officials stress to us they are trying to avoid a direct operational
impact. As part of the fallout, Iceland's Ambassador to the United
States will be transferred several years ahead of schedule in early
2009, though we have been assured in Reykjavik that the MFA will
make staffing in Washington one of its top priorities. With the
cuts, the Foreign Minister is sending a clear signal that she will
be demanding fiscal responsibility from the coalition's other
ministers. End Summary.


2. (U) On November 12, Foreign Minister Ingibjorg Solrun Gisladottir
announced Ministry for Foreign Affairs (MFA) plans to cut its
expenditures in FY 2009. In the context of the current economic
crisis, the MFA is the first ministry to propose cutting its
allocations in the draft budget bill currently with the Althingi
(parliament). The MFA plans to cut a total of ISK 2.3 billion
(roughly $17 million) or 20 percent of its share of the proposed
2009 budget. Most notably, four Icelandic missions will be closed:
the Icelandic Embassy in Pretoria, South Africa; the Permanent
Mission to the Council of Europe in Strasbourg, France; the
Permanent Mission to the United Nations Agencies in Rome; and an
Icelandic International Development Agency office in Colombo, Sri
Lanka that handles Iceland's development aid. Six Icelandic
Ambassadors will retire in 2009: two at the beginning of the year
and four later in the year; they will not be replaced, thereby
reducing a major salary expense for the MFA. FM Gisladottir
appointed one new Ambassador, Kristin Arnadottir, who previously was
a Special Envoy for Iceland's bid for a UN Security Council seat and
will now serve in effect as her Chief of Staff.


3. (SBU) Iceland's diplomatic presence in the U.S. will also be
affected. Ambassador to the United States Albert Jonsson will leave
his post in early 2009 to head the Icelandic liaison office in the
Faroe Islands. Jonsson's departure will shorten his tenure by
several years from the traditional ambassadorial tour of duty, as he
has only been in Washington a little less than two years. Post had
also initially understood that the Deputy Chief of Mission post in
Washington would not be filled when the incumbent transfers next
summer; however, senior MFA officials here tell Ambassador that the
MFA is committed to staffing Washington with the best people it can
find. In New York City, two positions at the Consulate General will
be moved to Iceland, and the position of Consul General will not be
filled when the current Consul General retires at the end of this
year. This is part of a worldwide shift in which foreign service
staff at different overseas posts will be moved back to Reykjavik to
work at the MFA main office.


4. (SBU) The cost cutting will also affect defense-related spending.
The MFA proposes that this be cut by ISK 257 million (about $1.9
million),from the previous allocation of ISK 1.4 billion (roughly
$10.3 million). Post learned from a contact at the Icelandic Defense
Agency that the MFA had simply notified them that their budget had
been cut by a certain percentage, but that the details would be left
up to the agency. The contact did not indicate what that percentage
was. In the announcement, the FM suggested that the Icelandic
Defense Agency would reduce the frequency of air policing by other
NATO member states from four to three deployments annually.
However, in a subsequent conversation with Ambassador, MFA officials
stressed that they were looking first at overtime and "inflated"
salaries at the IDA as targets for cuts. The MFA is making every
effort to avoid cuts that will have a direct operational impact on
the IDA.


5. (U) The MFA has also proposed to lower Iceland's contribution to
international aid. Allocations to this spending item would decrease
by ISK 1.67 billion (approximately $12.3 million). The GOI planned
to contribute 0.35 percent of GNP to international aid, but after
the proposed reduction the share will be 0.24 percent of GNP. The
GOI had hoped to reach the UN benchmark of 0.7 percent of GNP in the
next couple of years, but the cost-cutting measures at the MFA will
without a doubt put that goal on hold for the unforeseeable future.
Initial reaction from the NGO community here was measured; the Head
of the Icelandic Human Rights Center, which has long pressed the MFA
to increase development aid, said the cuts were "understandable"
given the economic situation in Iceland.

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6. (U) One of the MFA's showpiece public diplomacy and trade
promotion tools also came under the knife. The MFA had expected to
spend ISK 485 million (about $3.6 million) on Iceland's
participation in the World Exposition at Shanghai in 2010. The MFA
now proposes that only ISK 140 million (about $1 million) be spent
on the EXPO. This is a 71-percent reduction from the total budgeted
amount.


7. (SBU) Comment: The Foreign Minister is the first agency head here
to announce what specific programs she will cut in light of
Iceland's economic collapse. She obviously intends to use this
example to press other ministries to follow her lead. Some are
concerned that closure of embassies will be a mistake in the long
run, but cuts here and in defense spending address two of the most
commonly-criticized areas of the MFA's budget: expensive overseas
operations and defense spending in a country without a military. On
the other hand, bloggers and pundits are having a field day with the
appointment of Kristin Arnadottir, a long-time friend and colleague
of FM Gisladottir, as Ambassador. Observers also see political
motives in the transfer of Ambassador Jonsson from the United States
to the Faroe Islands, with some calling it humiliating for both
Jonsson and his long-time mentor David Oddsson, former PM and
current Central Bank Chairman. Oddsson and Gisladottir are known to
be political rivals, so the shift is unsurprising in that regard.
That said, we expect that the MFA will place a priority on staffing
the Washington Embassy well. End Comment.

VAN VOORST