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

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UNCLAS SECTION 01 OF 02 REYKJAVIK 000213 
 
USDOC FOR LEAH MARKOWITZ 
TREASURY FOR LAWRENCE NORTON 
STOCKHOLM FOR FCS 
 
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SENSITIVE 
 
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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 
 
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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