Viewing cable 10LONDON21, UK - UNHAPPY WITH ICELANDIC PRESIDENT'S DECISION

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UNCLAS E F T O SECTION 01 OF 02 LONDON 000021 
 
SIPDIS 
NOFORN 
 
TREASURY FOR HORTON, WINN 
NSC FOR HOVENIER, BRADLEY 
 
E.O. 12958: N/A 
TAGS: ECON EINV IC NE UK
SUBJECT: UK - UNHAPPY WITH ICELANDIC PRESIDENT'S DECISION 
ON ICESAVE, BUT NO OFFICIAL PROTEST - YET 
 
REF: REYKJAVIK 000003 
 
¶1. (SBU/NF) Summary: The UK government did not anticipate 
that Iceland President Grimsson would block the legislation 
on Icesave with UK Treasury officials telling us that until 
the morning of January 5, Icelandic officials had reassured 
the UK that the law would be signed. Given that Iceland's PM 
was taken aback by Grimsson's decision and had even 
questioned whether such an action was constitutional, the 
British government wants to give the Icelandic government 
time to work this out internally. The UK hopes that Iceland 
does not take any precipitous steps - such as holding a 
referendum - that could further complicate this situation and 
undermine support for Iceland's EU's membership and an 
additional IMF tranche. Official UK comments to the press 
have referenced the risks to Iceland's EU membership. 
End Summary. 
 
UK Reaction 
----------- 
 
¶2. (U) In reaction to the announcement by the President of 
Iceland that he would not sign into law the Icesave bill 
passed by Iceland's parliament on December 30 and would 
instead refer the bill to a national referendum, Lord Myners, 
the financial services minister, said Iceland risked pariah 
status if voters rejected the loan repayment plan. He added 
that Iceland was aware of the risks to its relationship with 
the IMF and EU if it failed to repay the money. "I do not 
think it is a case of us having to warn them," he said. The 
Prime Minister's office issued the following statement: "The 
government expects the loan to be repaid. We are obviously 
very disappointed by the decision by the Icelandic president, 
but we do expect Iceland to live up to its legal obligations 
and repay the money." 
 
¶3. (U) On the eve of Grimsson's announcement, Chancellor of 
the Exchequer Darling had urged the Icelandic president to 
sign the legislation. Darling told the British press that 
"We have spent many, many months in productive meetings with 
Icelandic authorities and the Icelandic government to enter 
an agreement to make sure that money was reimbursed to us." 
Darling said it was vital for Iceland's economic future that 
the Icesave compensation was repaid. "I would say to the 
people in Iceland that it is difficult but you have to 
realize that the British government had to step in to deal 
with a very difficult situation with savers in Icelandic 
banks." 
 
¶4. (SBU/NF) Treasury Head of Financial Services Strategy Gary 
Roberts told ECOUNS January 6 that the UK has consistently 
maintained and will continue to emphasize that Iceland needs 
to meet its European Economic Area (EEA) obligations. 
However, Roberts said that UK at this stage wanted to avoid 
making a direct linkage between repayment and Iceland's 
membership in the EU. However, the UK government would be 
forced to react if the European Commission proceeded in 
considering Iceland's membership if Iceland were in 
violation of its EEA obligations. Under such rules, a nation 
cannot join the EU if it has failed to insure its banking 
deposits outside its borders. Roberts noted that the UK hoped 
that other interested parties would ensure that the loan 
question was resolved before any membership discussion was 
conducted. 
 
¶5. (SBU/NF) HMT officials said it would be difficult for the 
UK to support the next IMF review for Iceland if the decision 
on repayment were still unresolved. It would also be in no 
one's interest, postulated Roberts, to have a review anytime 
soon, since no one knows yet what the macro-economic effects 
of Grimsson's decision will be. Note: Immediately after the 
Icelandic president's decision, Fitch downgraded Iceland's 
credit rating to junk status. 
 
The Terms 
--------- 
 
¶6. (SBU/NF) Roberts reiterated that discussions with 
Icelandic officials have always been productive and cordial, 
and called press stories about an acrimonious "dispute" 
between the UK and Iceland over the terms "erroneous." The 
UK will not renegotiate terms of agreement, said Roberts. 
Terms were "generous", with payments spread out over several 
years, a waiver of interest rate payments for seven years, 
and a 5.5 percent interest rate consistent with ten-year 
 
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gilts. Moreover, UK terms were better than the Nordics, 
which had interest rates 200-300 basis points higher, he 
noted. 
 
¶7. (SBU/NF) According to the UK press, HMT will begin talks 
with Brussels and its counterparts in the Netherlands. 
Roberts said HMT wants to ensure that neither the UK nor 
Dutch government takes precipitous action that would hamper 
the Icelandic government's ability to sort this out itself. 
 
Visit London's Classified Website: 
http://www.intelink.sgov.gov/wiki/Portal:Unit ed_Kingdom 
 
LeBaron