VZCZCXRO2945
OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHRK #0227 2831813
ZNY CCCCC ZZH
O 091813Z OCT 08 ZDK
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3838
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L REYKJAVIK 000227 
 
SIPDIS 
 
STATE FOR EUR/FO 
 
E.O. 12958: DECL: 10/07/2018 
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC ECONOMIC CRISIS:  THIRD BANK GOES DOWN AS MASS 
FIRINGS START 
 
REF: Reykjavik 223 
 
Classified By: DCM Neil Klopfenstein for reasons 1.4 (b) and (d). 
 
1.(C)  Summary: The Icelandic economic crisis worsened as the 
last(and largest) of the big three banks, Kaupthing, was taken over 
by the Icelandic government; the Icelandic stock exchange was shut 
down until Monday; one-third of Landsbanki employees were fired; and 
two new entities were created to take over domestic operations of the 
former Landsbanki and Glitnir banks.  The possibility of a Russian 
loan continues to generate GOI assertions that finances and foreign 
policy can be kept separate.  The Prime Minister stated that the 
Icelandic government had not asked for a loan from the IMF, but 
discussions continue in Reykjavik.  The Minister of Finance travels 
to Washington today, and his meeting at the U.S. Treasury Friday will 
be important in focusing the Icelanders on a viable way through this 
disaster.  End Summary. 
 
¶2. (SBU) The Chairman of Kaupthing Bank's Board, Sigurdur Einarsson, 
blamed British authorities for Iceland's Financial Supervisory 
Authority (FME) take over of Kaupthing in the early hours of October 
¶9.  The FME, which used the new emergency legislation authority, 
asserted that the takeover will insure continued commercial bank 
operations in Iceland and that Kaupthing's domestic deposits are 
fully guaranteed.  Einarsson said the British authorities' October 8 
seizure of Kaupthing Edge deposit accounts valued at 3 billion 
pounds, and the forced suspension of payments of Kaupthing's 
subsidiary in London, had been interpreted as a technical default on 
loans by Kaupthing's creditors.  The British apparently invoked 
anti-terrorism laws created in the aftermath of 9/11 to freeze 
Icelandic assets in the UK.  The Icelandic media is reporting that UK 
Chancellor Darling took this action after a miscommunication with 
Minister of Finance Arni Mathiesen over whether Landsbanki's IceSave 
accounts in the UK would be guaranteed by the Icelandic authorities. 
The association with terrorism has infuriated Icelandic authorities. 
 
¶3. (SBU) Iceland closed its stock exchange this morning.  An official 
statement from the OMS Stock Exchange said, "Due to unusual market 
conditions NASDAQ OMX Iceland has decided to suspend temporarily 
trading on its equity markets.  The equity markets will re-open for 
trading on Monday, October 13." 
 
¶4. (SBU) Despite assurances yesterday by the Minister of Commerce and 
the Minister of Finance that bank employees would not lose their 
jobs, Landsbanki fired one-third of its employees today.  This will 
likely impact the unemployment rate by close to half a percentage 
point.  The FME created two new bank entities "New Landsbanki Island, 
hf" and "New Glitnir Bank, hf" to conduct the domestic operations of 
their predecessor banks. 
 
¶5. (C) The Russian loan is still part of Iceland's plan.  Prime 
Minister Haarde said last night that the loans from the IMF and 
Russia "are not mutually exclusive" though the government had not 
asked IMF for a standby loan or an economic program.  He repeated 
that statement in a press conference today.  Questions about the 
influence the loan might give Russia continue to be met by assertions 
that finances and foreign policy can and will be kept separate. 
 
¶6. (C) Minister of Finance Arni Mathiesen travels to Washington 
tonight for World Bank meetings.  Post persuaded the Minister to 
agree to meet with senior Treasury officials while in the U.S. 
Mathiesen will meet with Treasury A/S Clay Lowery on October 10.  We 
would hope this meeting will help the Icelanders think their way 
through the present crisis and move from a stopgap reactive approach 
to a durable comprehensive plan.  It should also make clear to them 
how the U.S. can and cannot be of assistance and point them in the 
direction of other options. 
 
van Voorst