ICELAND SETTLES ICESAVE DEPOSIT GUARANTEE DISPUTE WITH THE UK AND HOLLAND

UNCLASSIFIED,FOR OFFICIAL USE ONLY UNCLAS REYKJAVIK 000102 STATE FOR EUR/NB NSC FOR HOVENIER TREASURY FOR ERIC MEYER AND LARRY NORTON SIPDIS SENSITIVE E.O. 12958: N/A TAGS: PGOV, ECON, EFIN, PREL, IC SUBJECT: ICELAND SETTLES ICESAVE DEPOSIT GUARANTEE DISPUTE WITH THE UK AND HOLLAND Ref: Reykjavik 101 1. (U) On June 5, Icelandic media reported that the GOI and the Governments of the UK and the Netherlands had struck a deal over the Icesave dispute. The GOI has agreed to take a $5.44 billion loan from the UK and the Netherlands to repay the minimum deposit guarantee to those who lost their savings with the collapse of Landsbanki and its online savings unit Icesave. The UK will lend Iceland GBP 2.35 billion ($3.76 billion) and the Netherlands EUR 1.2 billion ($1.68 billion). The loan will have a grace period of seven years, during which the Icelandic Treasury will not contribute to payments, and the total length of the loan is 15 years. The loan has an interest rate of 5.5 percent which will start accruing immediately. The Icelandic Depositors' and Investors' Guarantee Fund will issue bonds for the entire loan amount. Landsbanki will be responsible for the Fund's payments (from their liquid assets and from future asset sales) while the Icelandic state will act as a guarantor. 2. (SBU) The Icelandic negotiation team of six was headed by former government minister and current Ambassador to Denmark, Svavar Gestsson, while the other five are representatives of the Ministries for Foreign Affairs, Finance and Business Affairs as well as the Central Bank. Sesselja Sigurdardottir, First Secretary in the Icelandic Foreign Ministry's European Office, who sat in on the negotiations, confirmed to EmbOff that the agreement had been signed and that the major details outlined in the Icelandic media were correct. She stressed that the agreement is contingent upon the Parliament's approval of the State being a guarantor for Landsbanki's payments. 3. (SBU) Despite months of predictions that such a deal would be reached eventually, the media is reporting the signing of the agreement as an entirely new, shocking development and has estimated the debt to be at 3 million ISK ($24,000) per person. The Progressive Party (PP) leadership called the terms a "terrible agreement" and described it as "selling the people into slavery". Bjarni Benediktsson, Independence Party (IP) Chair said that he is not happy with the agreement, but realizes that the GOI was in a very difficult position. A visibly relieved UK Ambassador Ian Whiting described to EmbOff an amiable negotiation between the three sides, though he did note some concern over the public hammering the GOI is now taking over the agreement. 4. (SBU) It is unclear if the proposal will be supported at the Icelandic parliament and two Left-Green party (LG) MPs have not yet stated if they will vote for it. For her part, LG Deputy Chair and Minister of Education, Katrin Jakobsdottir, lamented the opposition response to the proposed agreement, saying it was disappointing that politicians were arguing against a draft agreement that by their own admission they had not yet read. However, she admitted to being pleasantly surprised at the muted reaction from IP Chair Benediktsson, terming it "almost a responsible statement, really." On June 8, four hundred people attended a protest against the agreement that was partly organized by the Citizens' Movement (CM) MPs in front of the parliament building at the same time as Finance Minister Steingrimur J. Sigfusson presented an oral report on the agreement. CM MPs say they are not satisfied with the agreement -- some even questioning the principle of Iceland's acceptance of responsibility for the deposit guarantees -- and will try to call a referendum on the issue. 5. (SBU) Comment: The government is not out of the woods yet, but has succeeded in removing a major irritant in its relations with EU member states as a whole and Britain and Holland in particular. This should smooth the way for a positive review at the IMF later this summer, as well as for a happier reception of any forthcoming EU membership application by Reykjavik. That said, the major challenge lies in convincing the public that no better deal could have been reached, and that simply refusing the pay was not a realistic option for a small island nation with European ambitions. The lukewarm -- or even negative -- reaction from some of FinMin Sigfusson's fellow party members shows just how much work lies ahead. KLOPFENSTEIN