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### Viewing cable 08REYKJAVIK213, ICELAND: GOVT BUYS 75 PERCENT SHARE IN THIRD-LARGEST BANK

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08REYKJAVIK213 | 2008-09-30 12:12 | 2011-01-13 05:05 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Reykjavik

`

    VZCZCXRO4895
    OO RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
    RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
    DE RUEHRK #0213/01 2741237
    ZNR UUUUU ZZH
    O 301237Z SEP 08
    FM AMEMBASSY REYKJAVIK
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 3818
    INFO RUCPDOC/USDOC WASHDC IMMEDIATE
    RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
    RUEHZL/EUROPEAN POLITICAL COLLECTIVE

` `

    UNCLAS SECTION 01 OF 02 REYKJAVIK 000213

    USDOC FOR LEAH MARKOWITZ
    TREASURY FOR LAWRENCE NORTON
    STOCKHOLM FOR FCS

    SIPDIS

    SENSITIVE

    E.O. 12958: N/A
    TAGS: ECON EFIN IC
    SUBJECT:  ICELAND: GOVT BUYS 75 PERCENT SHARE IN THIRD-LARGEST BANK

    ¶1.  (U) Summary:  The Government of Iceland announced on 29
    September that it is taking a majority share in Glitnir Bank, the
    country's third largest bank.  The move follows a frantic round of
    secret weekend consultations between Prime Minister Haarde, the
    Central Bank, the heads of all major political parties, and
    Iceland's leading banks.  Under the agreement, the Government will
    purchase 75 percent of Glitnir at roughly $878 million.  This is the
    first significant government intervention in the Icelandic economy
    during the recent crisis and comes after a week of harsh criticism
    for perceived inaction -- in particular, for not managing to include
    Iceland in the 24 September exchange agreement between the U.S.
    Federal Reserve and the central banks of the other Nordic countries
    and Australia. The immediate result of the bailout was the
    pre-filing for bankruptcy of a holding company which is
    interconnected to a large portion of businesses.  It appears that
    Glitnir will be saved, but the domino effect of weakened share
    prices could still damage the overall economy. End Summary.

    ¶2.  (U) The Government of Iceland announced on September 29 that it
    would buy a 75 percent share in the country's third-largest bank,
    capping a tumultuous week in the economy here.  On September 24, the
    US Federal Reserve announced it was making $30 billion available to
    the central banks in Australia, Denmark, Sweden and Norway to ease
    money markets through an exchange agreement to improve global
    liquidity.  The Central Bank of Iceland came under immediate fire
    from Icelandic financial experts and the media for not getting
    itself included in the agreement.  After refusing comment for nearly
    24 hours, the Central Bank of Iceland issued a statement saying that
    it had been engaged in talks with the Federal Reserve in the past
    weeks.  According to the statement, the U.S. Fed did not see a
    reason to make such an agreement with the Central Bank of Iceland at
    this point, but the possibility of a future agreement has not been
    ruled out.

    ¶3.  (U) For most of September, several well-respected economists and
    leading editorialists have publicly criticized the Central Bank's
    monetary policy and the GOI's handling of the ever worsening
    economic situation.  Some even called for the resignation of the
    entire board of governors of the Central Bank.  The rapid fall of
    the Icelandic krona (40 percent since the beginning of 2008) and the
    news of the exclusion of Iceland from the other Nordic's agreement
    with the U.S. Federal Reserve only exacerbated the public outcry.
    This criticism has fueled a growing sentiment that Iceland should
    explore joining the EU and adopt the euro, with recent opinion polls
    showing for the first time majority support for exploring the
    possibility.

    ¶4.  (U) On September 27, PM Geir Haarde called a meeting with the
    board of governors at the Central Bank and his economic advisors.
    When asked, Haarde said he was only familiarizing himself with any
    developments that had taken place while he had been attending the
    UNGA in New York.  After the meeting he said that such a meeting was
    normal and that no big news was about to break.  On September 28,
    Haarde  and the Central Bank of Iceland's board of governors held a
    late-night meeting with executives from Iceland's three main
    commercial banks, Kaupthing, Landsbanki, and Glitnir and
    representatives from the Social Democratic Alliance -- the junior
    party in the coalition government -- and the opposition parties.

    ¶5.  (U) On Monday, September 29 the media announced that the GOI was
    taking control of Glitnir, the third largest Icelandic bank, buying
    a 75 percent stake for 600 million euros (approximately $878
    million), more than 6 percent of Iceland's 2007 GDP. This move was a
    surprise to the general public.  All parties involved quickly
    announced the problem was related to international financial markets
    and not the management or assets of the bank itself.  The Central
    Bank said Glitnir's asset portfolio and capital position were solid
    and its loans were good quality; it said it did not intend to keep
    its stake in Glitnir for an extended period.  The Prime Minister
    held a press conference to echo the Central Bank's sentiments and
    added that the government must safeguard financial stability.
    Glitnir said its core operations were robust and CEO Larus Welding
    had been asked to stay.  Glitnir said it had been successful in
    raising funds this year despite very challenging market conditions,
    "nonetheless, the events unfolding in international financial
    markets in the past two weeks have had unforeseen consequences
    drastically changing the conditions of Glitnir's short-term
    funding," the bank said in a statement.

    ¶6.  (SBU) Post's contacts at Glitnir confirmed that even bank
    employees had no idea this was coming.  Glitnir's management has
    told employees that because the bank was very well run and
    management was not the problem, everyone will probably keep their
    jobs.  The larger concern is for stockholders; because the number of
    Glitnir's stock had to be increased to provide the state with 75

    REYKJAVIK 00000213  002 OF 002

    percent equity, Glitnir's stock lost even more value than
    market-induced declines and had dropped 88 percent of its value by
    the end of the day.  The biggest shareholder of Glitnir is Stodir
    (formerly FL Group and connected with Baugur Group) which just filed
    for pre-bankruptcy.  The ripple effect of one of financial titan
    Baugur Group's major assets going bankrupt could set off other
    disruptions in the economy.

    ¶7.  (SBU) Comment:  Although the main problem of Glitnir was the
    inaccessibility to short term-credit caused by the global shortage
    of liquidity, resolving this has not cured all ills.  The news on
    Glitnir's bailout sent the Icelandic krona to a fresh record low
    against the euro and caused the value of Glitnir's stock to plunge.
    Given that in recent years Iceland's economic success has been
    largely based on leveraged buyouts, the plummeting value of stocks
    could have drastic consequences throughout the economy.

    VAN VOORST

`