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

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O 071153Z OCT 08
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TO RUEHC/SECSTATE WASHDC IMMEDIATE 3826
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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 
 
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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