UNCLAS REYKJAVIK 000102

STATE FOR EUR/NB
NSC FOR HOVENIER
TREASURY FOR ERIC MEYER AND LARRY NORTON

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: PGOV ECON EFIN PREL IC
SUBJECT: ICELAND SETTLES ICESAVE DEPOSIT GUARANTEE DISPUTE WITH THE
UK AND HOLLAND

Ref: Reykjavik 101


1. (U) On June 5, Icelandic media reported that the GOI and the
Governments of the UK and the Netherlands had struck a deal over the
Icesave dispute. The GOI has agreed to take a $5.44 billion loan
from the UK and the Netherlands to repay the minimum deposit
guarantee to those who lost their savings with the collapse of
Landsbanki and its online savings unit Icesave. The UK will lend
Iceland GBP 2.35 billion ($3.76 billion) and the Netherlands EUR 1.2
billion ($1.68 billion). The loan will have a grace period of seven
years, during which the Icelandic Treasury will not contribute to
payments, and the total length of the loan is 15 years. The loan
has an interest rate of 5.5 percent which will start accruing
immediately. The Icelandic Depositors' and Investors' Guarantee
Fund will issue bonds for the entire loan amount. Landsbanki will
be responsible for the Fund's payments (from their liquid assets and
from future asset sales) while the Icelandic state will act as a
guarantor.


2. (SBU) The Icelandic negotiation team of six was headed by former
government minister and current Ambassador to Denmark, Svavar
Gestsson, while the other five are representatives of the Ministries
for Foreign Affairs, Finance and Business Affairs as well as the
Central Bank. Sesselja Sigurdardottir, First Secretary in the
Icelandic Foreign Ministry's European Office, who sat in on the
negotiations, confirmed to EmbOff that the agreement had been signed
and that the major details outlined in the Icelandic media were
correct. She stressed that the agreement is contingent upon the
Parliament's approval of the State being a guarantor for
Landsbanki's payments.


3. (SBU) Despite months of predictions that such a deal would be
reached eventually, the media is reporting the signing of the
agreement as an entirely new, shocking development and has estimated
the debt to be at 3 million ISK ($24,000) per person. The
Progressive Party (PP) leadership called the terms a "terrible
agreement" and described it as "selling the people into slavery".
Bjarni Benediktsson, Independence Party (IP) Chair said that he is
not happy with the agreement, but realizes that the GOI was in a
very difficult position. A visibly relieved UK Ambassador Ian
Whiting described to EmbOff an amiable negotiation between the three
sides, though he did note some concern over the public hammering the
GOI is now taking over the agreement.


4. (SBU) It is unclear if the proposal will be supported at the
Icelandic parliament and two Left-Green party (LG) MPs have not yet
stated if they will vote for it. For her part, LG Deputy Chair and
Minister of Education, Katrin Jakobsdottir, lamented the opposition
response to the proposed agreement, saying it was disappointing that
politicians were arguing against a draft agreement that by their own
admission they had not yet read. However, she admitted to being
pleasantly surprised at the muted reaction from IP Chair
Benediktsson, terming it "almost a responsible statement, really."
On June 8, four hundred people attended a protest against the
agreement that was partly organized by the Citizens' Movement (CM)
MPs in front of the parliament building at the same time as Finance
Minister Steingrimur J. Sigfusson presented an oral report on the
agreement. CM MPs say they are not satisfied with the agreement --
some even questioning the principle of Iceland's acceptance of
responsibility for the deposit guarantees -- and will try to call a
referendum on the issue.


5. (SBU) Comment: The government is not out of the woods yet, but
has succeeded in removing a major irritant in its relations with EU
member states as a whole and Britain and Holland in particular.
This should smooth the way for a positive review at the IMF later
this summer, as well as for a happier reception of any forthcoming
EU membership application by Reykjavik. That said, the major
challenge lies in convincing the public that no better deal could
have been reached, and that simply refusing the pay was not a
realistic option for a small island nation with European ambitions.
The lukewarm -- or even negative -- reaction from some of FinMin
Sigfusson's fellow party members shows just how much work lies
ahead.

KLOPFENSTEIN