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### Viewing cable 08REYKJAVIK219, ICELANDIC GOVT TAKES CONTROL OF BANKING SECTOR AMID CRISIS

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08REYKJAVIK219 | 2008-10-07 11:11 | 2011-01-13 05:05 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Reykjavik

`

    VZCZCXRO0146
    OO RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
    RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
    DE RUEHRK #0219/01 2811153
    ZNR UUUUU ZZH
    O 071153Z OCT 08
    FM AMEMBASSY REYKJAVIK
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 3826
    INFO RUCPDOC/USDOC WASHDC IMMEDIATE
    RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
    RUEHZL/EUROPEAN POLITICAL COLLECTIVE

` `

    UNCLAS SECTION 01 OF 02 REYKJAVIK 000219

    USDOC FOR LEAH MARKOWITZ
    TREASURY FOR LAWRENCE NORTON
    STOCKHOLM FOR FCS

    SIPDIS

    SENSITIVE

    E.O. 12958: N/A
    TAGS: ECON EFIN PGOV IC
    SUBJECT:  ICELANDIC GOVT TAKES CONTROL OF BANKING SECTOR AMID CRISIS

    REFS:  A) Reykjavik 217  B) Evans-Norton telecon  C) Evans-Meyers
    telecon
    ¶1.  (U) Summary: Prime Minister Geir H. Haarde addressed the nation
    late on October 6 with a sober message:  the banking system in
    Iceland was broken because of the global liquidity crisis and the
    government was taking emergency action to save Icelanders' domestic
    savings.  Immediately following his address, Haarde presented
    emergency legislation at Althingi (Parliament) which passed just
    before midnight.  This legislation gave the Icelandic government
    power to create financial institutions and to intervene in existing
    ones.  It removed the cap on insurance for domestic savings deposits
    in Icelandic krona and allowed the State Housing Fund to take over
    all mortgages.
    ¶2. (SBU) Summary continued:  Icelanders woke up on October 7 to
    learn that Landsbanki, the biggest bank in Iceland, was being taken
    over by the Financial Supervisory Authority.  They heard assurances
    that domestic savings were safe and domestic banking operations
    would continue.  The Icelandic krona started trading at 127 to USD,
    over a 100 percent devaluation from January 1 and bad news for
    Icelanders who have foreign currency mortgages and car loans, but
    the Central Bank quickly pegged the krona at 96 to USD.  A five
    member team from the International Monetary Fund arrived on Sunday
    at the invitation of the Prime Minister and is providing advice.
    The media reported that Russia is offering a 4 billion euro loan to
    the Central Bank but there has been no official announcement that
    the loan is accepted or how that will affect the current situation.
    We continue to monitor this fluid situation.  End Summary.
    ¶3. (U) Following a weekend of continuous meetings with stakeholders,
    Prime Minister Geir H. Haarde addressed the nation at 4:00 pm on
    October 6 with serious news.  He explained the current financial
    crisis was a global problem and Icelandic banks' past success meant
    that their liabilities are too large for the government (we
    understand about eight times GDP) to offer them a secure lifeline.
    Haarde hinted that the Icelandic financial system might be at the
    edge of breakdown and he would not risk Iceland's future for a
    bailout.   He said the banking system would have to be redesigned
    for Iceland before it could conduct international business again and
    announced that the buying and selling of stocks in the financial
    institutions would continue to remain frozen.  He said that all of
    the nation's savings deposit would be secured.  He called for unity
    among people and that the nation should stick to the values they
    hold dearest.  Haarde reminded that Iceland was blessed with natural
    resources and that would ensure a bright future even if the
    financial system will need to be rebuilt.  He closed his address
    with "God Bless Iceland," a phrase rarely used by politicians here.
    ¶4. (U) Soon after the address, the PM introduced emergency
    legislation at the Althingi (Parliament) which shortly passed before
    midnight with a few minor changes suggested by the opposition.  The
    newly passed emergency legislation gives the Icelandic government
    power to create financial institutions and to intervene in existing
    ones.  Under the law, the government has wide-ranging authority to
    take over banks, seize control of management and direct asset sales.
     The bill will also allow the government to take over housing loans
    held by the banks and put them in a government housing fund, an
    effort to help thousands of Icelanders who faced the loss of their
    homes amid rising payments due to inflation and the krona's
    devaluation (Note: All mortgages are inflation indexed and many were
    denominated in foreign currency.  End Note.)  A critical part of the
    new law is that Government of Iceland ensures that deposits in
    domestic commercial and savings banks and their branches in Iceland
    will be fully covered.  "Deposit" refers to all deposits by general
    customers and companies which are covered by the Deposit Division of
    the Depositors and Investors Guarantee Fund.
    ¶5. (U) On October 7, the Icelandic Financial Supervisory Authority
    (FME) announced that it had proceeded to take control of Landsbanki,
    the largest bank in Iceland.  The FME announced in a statement that
    all domestic deposits are fully guaranteed and that all Landsbanki
    domestic branches, call centers, ATMs, and Internet operations will
    be open for business as usual. The statement continued that the
    action taken is a necessary first step in achieving the objectives
    of the Icelandic Government and Parliament to ensure the continued
    orderly operation of domestic banking and the safety of domestic
    deposits.
    ¶6. (U) At opening of business on October 7, the Icelandic krona was
    trading at 127 to USD, over a 100 percent devaluation from January
    ¶1.  The media reported at 10 am local time that the krona is now
    pegged at 96 to USD.  The Central Bank announced the fixing of the
    krona at a rate corresponding to 131 per euro, effective immediately
    and that further moves to boost the currency will be announced in
    coming days.
    ¶7. (SBU) A five member team from the International Monetary Fund
    arrived on Sunday at the invitation of the Prime Minister.  Econoff
    talked with Rodolfo Luzio of the IMF team who confirmed that they
    are providing advice to the Government and that all options are on

    REYKJAVIK 00000219  002 OF 002

    the table for IMF assistance.  Luzio said that the IMF had been
    watching Iceland for some time and had visited earlier this summer.
    He noted that the situation was very fluid and he was unable to
    predict how long he would be in Iceland or what assistance would be
    provided.  Luzio said that the plan for bank intervention was a done
    deal before they arrived on October 5.
    ¶8. (U) On October 7, the Russian Ambassador to Iceland, Victor
    Tatarintsev, informed David Oddsson, the Chairman of the Board of
    Governors of the Central Bank of Iceland, that Russia will provide
    Iceland with a 4 billion Euros or 5.4 billion USD loan.  The Central
    Bank said in a statement that the loan would substantially
    strengthen Iceland's foreign reserves and support the Icelandic
    krona.  The Central Bank said the loans were for three to four years
    on terms that would be 30-50 points above Libor rates.  According to
    Reuters, Russian Deputy Finance Minister Dmitry Pankin said no
    decision had been taken on the loan.
    VAN VOORST

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