ICELAND: REFERENDUM RUMORS

UNCLAS REYKJAVIK 000004 NSC FOR HOVENIER TREASURY FOR NORTON SIPDIS E.O. 12958: N/A TAGS: PGOV PREL ECON EFIN UK IC SUBJECT: ICELAND: REFERENDUM RUMORS ¶1. (U) Summary: President Olafur Ragnar Grimsson's decision on January 5 to veto the Icesave bill sparked wild speculation regarding the stability of the Icelandic government and the country's economic future. One day later, as the dust begins to settle, it appears as though the country will move forward with plans to hold a national referendum on the topic with a vote occurring as early as February 20. It also appears that the current government intends to remain in power, at least until the referendum takes place. The future is less clear regarding the country's economic recovery after several Nordic Finance Ministries expressed their intentions to withhold a Nordic loan package until after the national referendum is completed. This decision complicates the IMF recovery program for Iceland which was largely predicated on Iceland's receiving this Nordic loan. End summary. Referendum Rumors and Government Stability -------------- ¶2. (U) President Olafur Ragnar Grimsson's decision on January 5 to veto the Icesave bill sparked wild speculation regarding Iceland's immediate future. The Icelandic constitution is clear in mandating that a national referendum occur shortly after the President refuses to sign a bill, but the law is vague on how to conduct such a referendum. The Icelandic parliament, which is currently on holiday recess, is expected to reconvene on January 8 to discuss the matter. The first order of business for parliament will be to introduce legislation clarifying the subject and laying out the procedures for a referendum. There are currently two bills sitting before parliament that address the topic, however, the government intends to submit a completely new bill that will apply exclusively to the current situation. The national referendum, according to the media, may take place as early as Saturday, February 20. ¶3. (U) The coalition government appears as though it will survive the political upheaval and chaos precipitated by the president's refusal to sign the Icesave law, at least until the national referendum takes place. Chairman of the parliamentary group for the Social Democrats, Bjorgvin G. Sigurdsson, said on January 5 that "the government will continue in power and will start preparations to hold the national referendum". Most commentators agree, however, that the coalition will likely collapse if voters strike down the Icesave law in the referendum. ¶4. (U) The situation in Iceland could become even more politically charged as the referendum, should it take place in mid February, would occur shortly after the release of a "Truth Commission" report. The report, which was commissioned by the government to investigate the causes of the bank collapse and to identify those responsible, is scheduled to be made public on February 1. The combination of these two highly volatile issues, occurring within such close proximity to one another, ensures that political tensions will be running high in Iceland. Economic Recovery in Doubt -------------- ¶5. (U) In the wake of the president's decision, several Nordic finance ministries came forward with statements suggesting that the Nordic loan of USD 2.5 billon to Iceland was now in jeopardy. Several of these ministries indicated that the Nordic loan would not be forthcoming at least until after the national referendum was conducted. The Deputy Director General at the Finnish Ministry of Finance, Ilkka Kajaste, said on February 6 that "the process will probably be delayed, as we will ask the British and the Dutch what they think about the situation. In any case, this will require a new assessment." ¶6. (U) This decision by the Nordic countries jeopardizes the IMF recovery package for Iceland which was, in large part, predicated on the Nordic loan package. The Iceland mission chief for the International Monetary Fund, Mark Flanagan, said that although an agreement on the Icesave issue was not a precondition for the IMF program, it was important that the IMF program be fully funded and he intended to consult with the other countries providing financing to the program. EAGEN