VZCZCXRO1858
PP RUEHIK
DE RUEHRK #0004 0061649
ZNR UUUUU ZZH
P 061649Z JAN 10
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 4253
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

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