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FM AMEMBASSY REYKJAVIK
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C O N F I D E N T I A L REYKJAVIK 000045 
 
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E.O. 12958: DECL: 02/26/2019 
TAGS: PREL PGOV MARR PHUM NATO ECON AF IC
SUBJECT: ICELAND: FM WARNS OF POSSIBLE DEFENSE BUDGET CUTS 
 
REFS: A) 08 OSLO 594 
  B) STATE 14097 
  C) REYKJAVIK 36 
  D) STATE 14201 
 
Classified By: Amb. Carol van Voorst for reasons 1.4 (b) and (d). 
 
¶1.  (C) Summary:  Icelandic Foreign Minister Skarphedinsson told 
Ambassador on 18 February that "nothing can be ruled out" on the 
question of further cuts to Iceland's defense budget, and floated a 
trial balloon on further reductions to Iceland's contingent in 
Afghanistan.  In public comments the next day, he went even further, 
suggesting that the Icelandic Defense Agency might be abolished 
entirely.  With the Ambassador, Skarphedinsson was positive on the 
possibility of greater Nordic defense cooperation as proposed in the 
Stoltenberg report, but was careful to note that this would only be a 
complement to NATO, not a replacement.  On Iceland's economic 
recovery, the FM vented that the Swedish Government continues to be 
"nit-picky" about the prerequisites for its promised bilateral loan. 
He welcomed news of USG reengagement in the Durban review process. 
End summary. 
 
¶2.  (U) Ambassador paid a congratulatory call on new Icelandic 
Foreign Minister Ossur Skarphedinsson on February 18.  (Note: 
Skarphedinsson has also retained his previous portfolio as Minister 
of Industry, Energy, and Tourism.)  The visibly tired but impish 
Skarphedinsson opened with a readout on the Nordic Foreign Ministers' 
meeting in Oslo on 13 February, at which former Norwegian Foreign and 
Defense Minister Thorvald Stoltenberg presented his report on 
opportunities for Nordic cooperation in defense and security. 
Skarphedinsson, who had chaired the meeting, joked that his biggest 
concern had been addressing the council in "Scandinavian" rather than 
English or Icelandic. 
 
¶3.  (C) Ambassador asked the FM for his view on local press 
discussion on the event, noting her concern that the coverage seemed 
to present Nordic defense cooperation as a possible replacement for 
NATO in the High North.  Skarphedinsson said he had been very careful 
to note in his comments at the meeting and with the press that Nordic 
cooperaton would only be a complement to NATO, not a replacement.  He 
opined that the Finns "want into NATO very badly" and as such are 
eager to participate in the NATO air policing mission here, while 
Swedish FM Bildt was much cooler to the idea.  Skarphedinsson added 
that talk of the Nordics taking over defense for Iceland was in his 
view a rehashing of Cold War-era arguments.  The left -- including 
some in Skarphedinsson's own party -- has seized on the Stoltenberg 
report as a chance to put forth the same old idea, but the FM said he 
did not believe anything will come of it. 
 
BUDGET CUTS A POSSIBILITY 
------------------------- 
 
¶4.  (SBU) Turning to Icelandic government funding for defense, 
Ambassador pressed the FM on rumors that further defense cuts -- 
beyond the 20 percent slashed from the Icelandic Defense Agency (IDA) 
budget for 2009 -- are in the works.  Skarphedinsson said he was 
taking a careful look at all options, including possibly combining 
some elements of the IDA mission with the Icelandic Coast Guard. 
"It's all on the table," said the FM, noting that these are very hard 
budget times for the Icelandic Government.  Asked for her view, 
Ambassador described the security structure constricted after the 
2006 U.S. withdrawal from Keflavik as a flexible, relatively cheap 
instrument that has served Iceland and its allies well.  She urged 
the FM to support defense funding and pressed the FM hard to counter 
the oft-heard notion that funding for defense is not money spent in 
Iceland.  Every krona the IDA gets for air policing purchases goods 
or services from Icelandic vendors, and deployed forces purchase fuel 
and spend money at tourism venues during their off-duty hours.  The 
FM asked whether it made any difference whether the IDA or another 
agency performed these functions, to which Ambassador replied that 
Iceland and the IDA have developed an excellent reputation with NATO 
militaries that have deployed here.  It is important to maintain 
those relationships and the rhythm of exercises and deployments in 
order to keep standards of proficiency and facilities maintenance 
high, she added.  Skarphedinsson thanked Ambassador for her views but 
remained noncommittal, reiterating that the ministry is under 
tremendous budgetary pressure.  He added that Iceland is not the only 
NATO Ally with such problems; the Spanish Air Force has cancelled its 
air policing rotation here later this year due to funding shortages. 
 
¶5.  (U) Note:  The following day, the FM went even further during 
open debate in the Althingi, suggesting that the IDA might be 
abolished entirely and its mission parceled out to various other 
agencies such as the Icelandic Coast Guard, Civil Aviation Authority, 
and National Police.  The Althingi's Foreign Affairs Committee Chair, 
who is from the minority government's other, openly pacifist party, 
immediately voiced his agreement, leading to press speculation that 
the IDA's days are indeed numbered.  End note. 
 
DOING EVEN LESS IN AFGHANISTAN? 
------------------------------- 
 
¶6.  (C) The penny-pinching theme continued in response to 
Ambassador's notification of the USG's Afghanistan-Pakistan policy 
review (Ref B).  Skarphedinsson said that he and his political 
advisor are carefully reviewing cost-saving possibilities, including 
a drawdown of Iceland's personnel deployed with ISAF.  (Note: 
Iceland currently has eight personnel at Kabul International Airport, 
ISAF HQ, and PRT Meymaneh.)  This has not been broached outside the 
FM's Office as Skarphedinsson knows the relevant offices will fight 
for every position, but as Minister he feels a responsibility to look 
at every way of saving money.  Ambassador pressed vigorously, noting 
that during his January visit to Iceland, SACEUR GEN Craddock 
personally vouched for the importance of every one of Iceland's 
billets in Afghanistan.  SACEUR traveled with then-FM Gisladottir to 
Kabul during her visit last spring, and in so doing became quite 
familiar with the Icelandic contingent's work, Ambassador added.  The 
work the Icelanders are doing is known and appreciated, and she urged 
the FM to maintain the current numbers. 
 
ECONOMIC RECOVERY, WHALING 
-------------------------- 
 
¶7.  (C) Touching briefly on Iceland's economic recovery, FM 
Skarphedinsson said that although tough times are ahead, Iceland will 
"come out better than many people expect."  Fishing, clean energy, 
and tourism will provide a strong basis for the economy's recovery. 
Less happily, the FM noted, some of the bilateral loans included in 
the IMF bailout package have been difficult to finalize.  Most 
notably, the Swedes have been very "nit-picky" on the details of 
Iceland's recovery plan.  Skarphedinsson dismissed these concerns as 
reflective of Sweden's traditional view of itself as the "big 
brother" who knows better in the bilateral relationship.  In 
contrast, Norway has historically been much more supportive of 
Iceland.  Picking up on the tourism theme, Ambassador noted her 
concerns about Iceland's intent to resume and expand its commercial 
whaling quota; the FM said he agreed but was not in a position to 
change the decision himself (ref C).  In closing, Skarphedinsson 
welcomed notification of U.S. reengagement in the Durban review 
process (ref D) and applauded the tone that President Obama and 
Secretary Clinton have brought to U.S. foreign policy. 
 
COMMENT 
------- 
¶8.  (C) The new FM is clearly feeling pressure from his colleagues in 
the government to demonstrate fiscal discipline, particularly as the 
minority coalition tries to make good on its pledge to directly ease 
the burden on Icelandic households.  Skarphedinsson has no built-in 
loyalty to the IDA, and though sold on the importance of NATO, he has 
at times been a reluctant advocate of the idea that Iceland should 
fund its own defense.  The lure of being able to cut nearly 10 
percent from the MFA's budget may simply be too much for the 
mercurial Skarphedinsson to resist.  With no other political backers 
in the current government and just over two months until elections, 
the IDA may indeed be fighting for its life.  Post will continue to 
press for a sober accounting of the operational costs of such budget 
slashing before any moves are made, and is quietly soliciting the 
interventions of other NATO embassies here as reinforcements. 
 
van Voorst