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