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C O N F I D E N T I A L REYKJAVIK 000264 
 
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DEPT FOR EUR/NB, EUR/RPM 
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E.O. 12958: DECL: 10/29/2018 
TAGS: MARR MOPS PREL NATO PGOV IC
SUBJECT:  Iceland's economic troubles:  Implications for the defense 
and security sector 
Classified by Ambassador Carol van Voorst for reasons 1.4(b) and (d). 
¶1. (C) Summary:  Iceland's economic collapse is spurring painful but 
necessary cost cutting measures by the Icelandic government.  One 
 
expected target of reductions is the defense budget, a very small 
part of the national budget but a line item with a high profile. 
Although a funding reduction is not certain, Post anticipates a 
reduction in the Icelandic Defense Department's budget and a 
consequent reduction in the frequency of defense exercises and host 
nation financial support for NATO air policing.  Reductions in 
Icelandic Coast Guard (ICG) operational tempo brought on by the 
economic collapse will also likely negatively impact the country's 
defense and security posture and will increase costs to nations 
deploying to Iceland.  End summary. 
 
¶2.  (C) The Icelandic government has had to ditch its planned 2009 
budget because of the massive downturn in the economic and financial 
situation of the country.  Although we have not seen an economic 
recovery "master plan" yet, the Icelandic government is prudently 
forging ahead with consideration of internal cost cutting measures. 
While budget estimates for FY2009 are still in flux, many voices both 
within and outside government advocate for a reduction in the second 
annual Icelandic defense budget, a tempting target for a parliament 
not accustomed to having to fund defense. 
 
¶3.  (U) The very first Icelandic defense budget was enacted for the 
2008 Icelandic fiscal year (January to December).  At the then 
current exchange rate the defense budget was approximately USD 20M; 
USD 12M of which was budgeted for the operation of the Icelandic Air 
Defense System (IADS) with the remaining money divided among exercise 
and other operational requirements of the Icelandic Ministry for 
Foreign Affairs Defense Department and its sub-directorate, the 
Icelandic Defense Agency (IDA).  (Note: The Defense Department 
implements defense policy while the IDA executes that policy in the 
form of operation of IADS, exercise planning, and managing 
relationships within NATO and EUCOM.)  Until the economic crash, the 
expectation was that the level of 2009 defense spending would remain 
more or less at this level, allowing all programs to continue as 
planned. 
 
¶4.  (C) When a senior IDA official was asked by the resident EUCOM 
LNO about his expectations for budget cuts, the official could not 
offer any solid information, stating that his senior defense 
leadership was waiting on direction from the senior executive level 
within the MFA.  He opined, however, that budget cuts were expected 
but in an unknown amount, that a hiring freeze was in place, and, 
although no layoffs were expected, there would be no new hiring to 
replaced anyone who resigned or retired.  He further indicated that 
continued Icelandic sponsoring of the annual Northern Viking exercise 
and NATO air policing missions - at least in their present form - 
were very much points for discussion. 
 
¶5.  (SBU) The cornerstone of the Icelandic defense program is IADS. 
Public statements by the Defense Director have been, not 
surprisingly, in favor of continued funding, citing Iceland's role 
within, and contribution to, the NATO integrated air defense system. 
Since IADS is one program the Defense Agency can cite as adding real 
world value to NATO operations, Post anticipates that the Defense 
Agency will fight hard to sustain its funding.  Other defense 
programs, however, may suffer from budget cuts. 
 
¶6.  (C) Iceland envisioned NATO air policing deployments to occur 
quarterly and thus far Denmark, France, and the US have fulfilled 
this mission.  The UK is scheduled to deploy to Iceland in December 
-- bilateral political tensions notwithstanding -- with Denmark 
recently agreeing to deploy here during the first quarter of 2009. 
Up until now, Iceland paid for messing, berthing, and ground 
transportation for visiting forces as well as ground handling for the 
aircraft.  These costs -- roughly $500,000 per deployment, or a total 
of less than 2.25 percent of the MFA's entire 2008 budget -- are 
small, but have a high political profile in a country that does not 
have a standing military.  Although Iceland's financial contribution 
to NATO air policing is very small relative to the cost incurred by 
the deployed forces, sources at the IDA and at Iceland's mission to 
NATO tell Post that Iceland is likely to ask for a reduction to three 
quarterly deployments vice four or, in the alternative, significantly 
reduce or even eliminate its host nation logistic support. 
 
¶7.  (C) Two Northern Viking exercises have been conducted since the 
closure of U.S. NAS Keflavik in 2006 and it has been Iceland's stated 
objective (laid out in our Joint Understanding of 2006) to continue 
the exercise on an annual basis.  As with the NATO air policing 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
deployment, Iceland as host nation provides significant logistic 
support for visiting forces, thus making the exercises a likely 
target for budget reductions.  Given the budget issues there has been 
some discussion within the IDA of converting this annual event to a 
biannual exercise. 
 
¶8.  (SBU) Although reporting to the Ministry of Justice, the 
Icelandic Coast Guard (ICG) has a significant role to play when it 
comes to defense and security issues in the High North.  The current 
economic issues--most especially the cost of fuel--have forced the 
ICG to eliminate underway time for its two patrol vessels and its one 
hydrographic vessel.  These vessels have remained pier side for the 
last six weeks.  Fortunately, a local fuel supplier has agreed to a 
deferred payment plan thus allowing one of the patrol craft to get 
underway November 10 with the other patrol craft to follow shortly. 
 
¶9.  (C) Funding shortfalls have had an impact on ICG air operations 
as well.  The ICG's three search and rescue (SAR) helicopters and one 
fixed wing aircraft remain grounded except for only those flights 
necessary to maintain crew qualifications and for actual search and 
rescue operations.  Furthermore, two of the three helicopters are 
leased from a Norwegian firm and the ICG has seen a 100 percent cost 
increase since the beginning of the year (both fuel and lease costs). 
 Compounding this is the leasing company's threat to terminate the 
leases and recall the helicopters due to the leasing company's 
perception that the ICG lacks the financial ability to make the lease 
payments - not to mention the ICG's actual problems with converting 
the Icelandic krona and transferring the payment internationally, a 
result of the collapse of Iceland's banking sector.  These concerns 
have more than just domestic implications:  the ICG provides real 
world SAR services for the Northern Viking exercises and NATO air 
policing.  If reduced funding translates into an inability to take on 
this tasking, visiting forces will have to provide their own SAR 
which, in turn, will dramatically increase the cost of their 
deployments to Iceland. 
 
¶10.  (C) Comment:  The Icelandic government is facing a financial and 
social catastrophe, and the demands on its 2009 budget will be 
severe.  A huge government debt plus growing need for social services 
as unemployment skyrockets will require the government to watch every 
penny.  We must expect budget reductions in defense spending that 
will most likely impact Iceland's ability to host military exercises 
or its financial support of NATO air policing deployments.   Post is 
coordinating with other NATO Allies here to encourage the government 
to keep a long-term security perspective in mind as it looks for 
places to trim the budget, and to look at the optional (exercises) 
before the essential (IADS, air policing support). 
 
VAN VOORST