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### Viewing cable 09REYKJAVIK58, ICELAND SCENESTTER FOR TREASURY DAS ERIC MEYER'S VISIT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09REYKJAVIK58 | 2009-03-18 17:05 | 2011-01-13 05:05 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Reykjavik

`

    VZCZCXRO3076
    PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
    RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
    DE RUEHRK #0058/01 0771727
    ZNR UUUUU ZZH
    P 181727Z MAR 09
    FM AMEMBASSY REYKJAVIK
    TO RUEHC/SECSTATE WASHDC PRIORITY 4028
    RUEATRS/DEPT OF TREASURY WASHINGTON DC
    INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

` `

    UNCLAS SECTION 01 OF 02 REYKJAVIK 000058

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

    SIPDIS

    SENSITIVE

    E.O. 12958:  N/A
    TAGS: PGOV ECON EFIN IC
    SUBJECT:  ICELAND SCENESTTER FOR TREASURY DAS ERIC MEYER'S VISIT

    ¶1. (SBU) Summary:  Since your previous visit three months ago,
    you'll find many changes in Iceland's economic and political
    landscape.  Businesses are hurting and unemployment has risen to an
    unprecedented ten percent.  Currency restrictions imposed in
    December were extended another six months until September 1.  News
    is not good on aluminum and fish, the two export-oriented pillars
    that are helping to prop up the ISK.  Following the escalating
    protests in January, the government fell and a leftist coalition was
    established.  Consequently, you'll be meeting a few new faces at the
    Ministries of Finance and Business Affairs and the Central Bank.  As
    the IMF team found during their recent visit, the political turmoil
    has delayed dealing with crucial issues like resolving IceSave
    account guarantees.  Pressure is rising on the Central Bank to lower
    interest rates, while the public's desire for EU membership and Euro
    adoption has deflated somewhat, with only the business community
    strongly advocating this move.  The parties in the interim coalition
    government are acting cautiously, knowing their actions today
    directly affect whether they will be elected in general elections
    slated for April 25.  The vital question of how the Icelandic
    economy will adapt to the new global economic realities remains
    unclear.  End Summary.

    ¶2. (SBU) The economic situation in Iceland has visibly deteriorated
    since December.  Unemployment is currently at 10.3 percent, a
    dramatic rise from under two percent just five months ago.  When you
    were last in Iceland, there were anecdotal claims that up to 70
    percent of businesses were technically insolvent because the
    depreciating ISK had ballooned their foreign currency loan payments.
     That has proven to be the case.  In addition to vacant construction
    sites with half-finished projects, a walk down the main shopping
    street in Reykjavik reveals newly vacant storefronts from failed
    businesses or desperate posters for final sales.  Other signs of the
    hard times include Baugur, one of the biggest holding companies in
    Iceland, declaring bankruptcy and the Financial Supervisory
    Authority's takeover of investment bank Straumur-Burdaras on March
    ¶9.  The temporary capital controls that expired March 1 were
    extended an additional six months.  The ISK is being helped by a
    small trade surplus, although the two main pillars for exports,
    aluminum and fish, have suffered in the global downturn.  Worldwide
    aluminum demand has dropped, and the resulting price decreases have
    slowed production at the country's smelters.  The reduced demand for
    fish has fisherman storing their catch; we hear reports that the
    freezer capacity is nearly maxed out.

    ¶3. (SBU) The public discontent over the economic situation and the
    government's apparent lack of action led to a series of escalating
    public protests.  As a result, the centrist government fell in
    January, and a leftist interim coalition was put in place.  The most
    relevant Cabinet changes to your visit are the new Minister (and
    Permanent Secretary) at the Ministry of Finance, a new Minister of
    Business Affairs, and a new Prime Minister.  Minister of Business
    Affairs Gylfi Magnusson, whom you will meet, is a non-political
    academic educated at Yale.  Upon installation of the new government,
    the Central Bank leadership structure was changed which resulted in
    the hire of a Norwegian interim Bank Director.  The Board at the
    Financial Supervisory Authority was also changed, with another
    academic appointed as Chair.

    ¶4. (SBU) As the IMF team found during their two-week visit that
    ended last week, the political turmoil has delayed dealing with
    crucial issues like resolving the dispute with the UK and other EU
    countries over deposit guarantees for the IceSave accounts.  The
    interim coalition is acting cautiously, knowing their actions today
    and the public perception of those actions will directly affect the
    outcome of the April 25 general elections.  Inconclusive public
    opinion polls have given the parties little ground to feel
    confident, and they are watching every move carefully.  As an
    example, one of the first acts of the new Minister of Health was to
    reverse the unpopular cost-cutting decision of his predecessor to
    close a small hospital, despite the fact that his Ministry is under
    the gun to make nearly ISK 7 billion ($60 million) in budget cuts.
    There is pressure on the Central Bank to lower the prime index rate.
     However, public calls to join the EU and adopt the Euro are not as
    intense as in October.  Only the business sector continues to
    advocate this position; the latest poll indicated 54.5 percent of
    the general public were against joining the EU.

    ¶5. (SBU) The change in government has also loosened tongues and
    you'll find many interlocutors are offering details of the situation
    leading up to the banks collapse.   The government was criticized
    for not investigating criminal activities within the banks and the
    international corporations, and as a response French-Norwegian
    anti-corruption crusader Eva Joly has been hired as a special
    government consultant for the investigation of economic crimes.
    Mysterious leaks to the media of the banks' loan books are revealing
    that the banks' owners were manipulating their stock prices and that
    the quality of loans (previously touted as sound) deteriorated

    REYKJAVIK 00000058  002 OF 002

    before the collapse.

    ¶6. (SBU) Comment:  Installing new experts in key positions such as
    the Central Bank, the Financial Supervisory Authority and some
    ministries, is positive and will provide needed expertise.  However,
    given that the interim government is acutely aware of the impending
    April 25 general elections, it is unclear how much progress will be
    made before a new government is installed.  The vital question of
    how the Icelandic economy will adapt to the new global economic
    realities remains unclear.  End Comment.

    VAN VOORST

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