UNCLAS SECTION 01 OF 02 REYKJAVIK 000020

SENSITIVE

SIPDIS

STATE FOR EUR/NB, INR-B
OSLO FOR DATT
DOD FOR OSD-P (FENTON)
TREASURY FOR LAWRENCE NORTON AND ERIC MEYER

E.O. 12958: N/A
TAGS: PGOV PREL ECON IC
SUBJECT: ICELAND: GOVERNMENT FALLS, UNITY COALITION IN THE OFFING?

Refs: A) Reykjavik 012
B) Reykjavik 013
C) Reykjavik 015
D) Reykjavik 017


1. (U) Summary: Despite a weekend of frantic efforts by the leaders
of Iceland's governing coalition to bring their parties to heel,
Prime Minister Haarde announced January 26 that the governing
coalition has fallen apart less than two years into its term. The
immediate cause was the demand of the junior party, the Social
Democratic Alliance, that the Haarde's Independence Party (IP) yield
the Prime Minister's seat and make other concessions. While Haarde
wants to establish a unity government with the IP at the head, there
is considerable doubt that he will be successful. President
Grimsson will meet with the heads of all the parties prior to giving
one the mandate to form a coalition. Many expect the SDA to be
tapped. Early parliamentary elections are expected. End Summary.

A Last-Ditch Effort Fails
--------------


2. (U) After Prime Minister Geir Haarde's dramatic announcement on
January 23 that he has been diagnosed with cancer and that his
Independence Party would call for early elections in May (ref D),
the stage was set for a weekend of furious negotiation between the
heads of the governing coalition. Haarde held several meetings over
the course of the weekend with Social Democratic Alliance Chair and
Foreign Minister Ingibjorg Solrun Gisladottir to discuss the future
of the government. Adding to the drama, on January 25 Minister of
Commerce Bjorgvin Sigurdsson (SDA) announced his resignation as well
as that of the entire board of the Financial Supervisory Authority
(FME). Sigurdsson said he hoped to take some responsibility for the
banking collapse, while also pointedly suggesting that the Board of
the Central Bank should consider doing the same.


3. (SBU) On January 26, the IP and SDA chairs met with their
respective parliamentary caucuses to brief on the weekend's
negotiations. The rumored outlines of the SDA's offer: in order to
keep the coalition alive, the IP needed to fire Central Bank
Chairman David Oddsson and the rest of the Board; agree to spring

elections; and yield the Prime Ministry to an SDA designee. By most
accounts, the third point was a bridge too far: the Political
Advisor to the Minister of Finance (IP) told PolOff that his boss
went into today's meeting willing to yield on the other requests,
but that the IP would rather walk than surrender the Prime
Minister's seat to its junior partner.


4. (U) Just after midday, PM Haarde announced to waiting press that
the Independence Party had been unable to agree to the SDA's
demands, and that the coalition would dissolve. While thanking SDA
Chair Gisladottir for her warm and honorable collaboration over the
last two years, Haarde had harsh words for the SDA and its "lack of
courage" to press forward with the coalition. He added that the SDA
demand for the Prime Ministry was a nonstarter and that it should
have been obvious to the SDA that this would never be accepted.
Referring to the urgent work awaiting the government as it
implements the International Monetary Fund's recovery program (ref
C), Haarde said he hoped to assemble a unity government under IP
leadership.


5. (U) Haarde met with Icelandic President Olafur Ragnar Grimsson
at day's end to formally relinquish his mandate to form a
government. Grimsson will now meet with the heads of the country's
other political parties, after which he will give one party the
mandate to assemble a coalition. Many expect that he will choose
Gisladottir's SDA, given Grimsson's previous political career in one
of the parties that combined to form the SDA.

What government next?
--------------


6. (SBU) Iceland will without a doubt see parliamentary elections
in the coming months, two years ahead of schedule. The opposition
parties, surging in polls as a result of popular displeasure with
the government, will want to lock in their gains at the ballot box,
and the outgoing government parties will want a chance to present a
new face to the public. However, in the interim a caretaker
government will most likely be established, and two possibilities
are getting the most discussion: a unity government with all five
parties in the Althingi, and a leftist minority government with the

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pledged support of the Progressive Party.


7. (SBU) On first reading, a unity government seems more likely,
given that all parties have now stated their desire for one.
However, such an agreement may be unattainable due to severe policy
conflicts between the IP and the Left-Greens. The Left-Greens (and
others) would be likely to object to a unity government under IP
leadership, given the current discontent with the government.
Beyond that, however, the Deputy Chair of the Left Green Movement
told PolOff just before the government fell that the Greens would
not come into government "just to be there. We have policy concerns
that we want to see addressed," such as renegotiation or outright
cancellation of the IMF loan and changes to the tax structure for
corporations and individuals. IP stalwarts such as a leading
investment banker have told EconOff that these moves are exactly
what the IP -- and the broader business community -- fear. Such
basic conflicts may make it impossible for the IP and the
Left-Greens to be in the same government, even a caretaker unity
government.


8. (SBU) A minority coalition between the Left-Greens and the SDA
would also pose problems. Though the new Progressive Party (PP)
chair has pledged to support such a minority coalition, the three
parties disagree on a number of issues (such as EU membership). The
SDA has also been a strong backer of the IMF bailout plan, which
could hinder SDA-LG cooperation just as it would a unity
government.


9. (SBU) COMMENT: Despite the unclear political situation and
limited options for a new coalition, all parties agree that there is
little room for delay. The Left-Greens want elections earlier than
all other parties, but all want to vote sooner than later. We
expect that a caretaker coalition, if there is to be one, will be
announced in the next few days, and will carry with it a date for
spring elections. Failing that, we expect President Grimsson to
announce the Althingi's dissolution and elections to follow within
45 days, as specified by the constitution.

VAN VOORST