TREASURY FOR MYERS AND NORTON
NSC FOR HOVENIER 

E.O. 12958: DECL: 11/13/2019
SUBJECT: INDEPENDENCE PARTY LEADER SEEKS MEETING WITH WHITE
HOUSE TO DISCUSS IMF 

Classified By: CDA SAM WATSON FOR REASONS 1.4 (B) AND (D) 

1.(C)  Summary. Charge d'Affaires (CDA) met Bjarni
Benediktsson, leader of the opposition Independence Party, to
discuss a range of issues on November 11.  Benediktsson was
eager to discuss a letter that he had sent recently to the
National Security Council (NSC) requesting a meeting with a
senior White House official.  Were he to receive such a
meeting, Benediktsson said he would express outrage with how
the IMF was used as a tool against Iceland in the Icesave
dispute.  He also would like to talk about future
opportunities for bilateral cooperation between Iceland and
the United States.  End Summary. 

Frustration with the IMF,s Role in Icesave
--------------------------------------------- -
2. (C)  Charge d'Affaires met opposition Independence Party
Chairman Bjarni Benediktsson to discuss a range of issues on
November 11.  Benediktsson said that one reason he hoped to
meet a high ranking official from the White House was to
express frustration with the role the IMF played in the
Icesave dispute. He opined that the Icesave matter was,
originally, an issue that involved only the
Governments of Iceland, Great Britain and the Netherlands.
The dispute among the three countries, he said, centered on
whether the Icelandic government must serve as guarantor for
British and Dutch depositors that lost money when the
Icelandic banking system collapsed.  There was no EU
legislation, according to Benediktsson, that obligated
Iceland to act as such a guarantor and legal precedents on
the topic were murky at best.  Great Britain and the
Netherlands, he said, understood that they were not operating
from positions of strength and brought the IMF into the
equation to force Iceland's hand.  The threat of withholding
IMF loans until the Icesave dispute was resolved was used to
force the Government of Iceland to capitulate.  It was, he
contended, a great misuse of the IMF and completely unfair to
Iceland. 

3. (C)  Benediktsson suggested that, at this point, the best
thing that could happen for the Icelandic people would be for
the measure to fail in a Parliamentary vote.  The British and
Dutch would then, he said, be forced to sue the Government of
Iceland and seek compensation via the courts.  A legal
solution would, he felt, be more preferable than the
negotiated settlement that is being thrust on the people of
Iceland.  Benediktsson added that if the British and Dutch
did not feel comfortable pursuing the matter via Icelandic
courts, he would be happy to suggest that the issue be
resolved by a tribunal of independent judiciaries.  He even
suggested that a U.S. Supreme Court Justice could play a role
as an arbitrator in the proceedings. 

4. (C) Bendiktsson said that, in an attempt to force the
issue into the courts, he intends to oppose the
government-sponsored Icesave bill when it comes up for a vote
in Parliament.  (Note:  Benediktsson, along with most of his
opposition Independence Party colleagues, abstained when the
previous law was passed in August.  End note).  He
acknowledged, however, that the coalition government probably
had the votes necessary to pass the measure through
parliament.  He also admitted that, were he to have his way
and the bill fail in parliament, it could further stall
Iceland's recovery efforts.  It would certainly mean no
further loans from the IMF and, without that cash inflow, the
government would be unable to lift its capital control
restrictions and would likely have to issue Euro bonds to
raise the necessary capital.  He also said he was not anxious
to assume leadership of the government, but preferred to
remain in opposition until after the May 2010 municipal
elections to benefit candidates from his party. 

Increased Bilateral Cooperation with the U.S.
--------------------------------------------- --
5. (C)  Benediktsson also hoped to discuss with the White
House ways to promote bilateral discussion and cooperation
between the United States and Iceland.  He said that when the
U.S. withdrew from the Keflavik Air Base in 2006 it created a
public perception that the relationship between Iceland and
the United States was deteriorating.  This perception, he
suggested, has only been enhanced with Iceland's recent
application to join the European Union.  Benediktsson
acknowledged that the Strategic Dialogue allows for annual
high level meetings between U.S. and Icelandic government
officials.  He felt, however, that even more dialogue was
necessary.  Benediktsson was somewhat vague with suggestions
on how to accomplish this but suggested that the Parlimentary 

REYKJAVIK 00000203  002 OF 002 

Foreign Affairs Committee visit the United States.  He then
asked whether, considering Iceland's current financial
problems, there might be some U.S. financing available to
facilitate such a trip.  (Note: Benediktsson later sent CDA a
follow up email expressing continued interest in meeting with
an official from the White House even if he came alone. End
note.) 

6. (C)  Comment:  Benediktsson continues to seek a meeting
with a high-ranking  White House official to discuss
increased cooperation and the IMF vote even though IMF board
review vote is long past.  His request may be a political
ploy designed to embarrass his opponents in the government
and make waves in the media.  On the other hand, it could
also fit into the agenda of his Independence Party, an
organization which has traditionally supported strong ties
with the United States and fiercely opposes Iceland's
application to join the EU.  Given his proposed solution on
Icesave, namely send it to the courts, his angle appears more
likely political than economic.  End comment.
WATSON

Related posts:

1. The Drunk In The Pond
2. Complexity Of IceSave Too Much For Althingi?
3. Ogmundur Resigns Amid IceSave Chaos

A comment from this post expressed wonder at the current situation in Iceland. Somehow many people expected things to be much worse for the general population by now. People are still going to coffee shops even if the latte is approaching the price of a pre-crash beer, there are still suspiciously many black Range Rovers in Reykjavik for a municipality outside Moscow and the homeless population still appears to find warm places to sleep. Children are going to school, playing football and teenagers are buying designer jeans for the pre-crash price of a banker’s suit.

So why do we need the EU? Isn’t everything running smooth in the state of Iceland without those pesky foreigners who apparently want our money and resources?

Peek below the surface and you might find ominous signs. More than 1.000 electricians have left Iceland for employment abroad. Most of the construction business has been wiped out. The largest construction firms which have been able to cut their staff by half and have had jobs until now are facing an alarming shortage of work as winter approaches. The financial sector is hopelessly overblown with perhaps up to 30% of the current staff basically there on an employment program. Wait for them to lose their jobs and see the effects it will have but it is estimated that each job lost in the financial sector leads to 6-7 jobs lost in other sectors.  The household debt has not gone anywhere either and while some might see relief in inflation above 5-6% it still contributes to suffocating increases in debt. Wages have gone down and so has the purchasing power. Icelandic households are playing the role of Indiana Jones running madly for the decreasing gap in the sliding door, hoping to be able to jump through with their hat before it locks them in the darkness.

It takes time for the full blown effects of an economic collapse to be realised. And things might be so much worse…were it not for the nations of the EU and the big, bad IMF.

A few things done by the government in the event of the collapse actually prevented a much greater crisis. One was the emergency law separating the banks local debts from the foreign debts and leave the foreigners hanging while guaranteeing all deposits in Iceland. This has lead to the tedious IceSave saga but it could have been so much worse for the Icelandic public if the emergency law had not been enacted. Another thing the government did was seek the help of the IMF, a great source of shame as it was the first for a “western democracy” in more than thirty years. And severe currency restrictions were implemented, allowing the Central Bank to build up its currency reserves and maintain a false exchange rate for the ISK. If you think 150 for the Euro is bad then imagine what it would be without the restrictions. Icelandic households and businesses would be cast into an eternal darkness of debt and the state’s foreign debt would rise to the levels of full-blown national bankruptcy.

But why the ignominy of the IMF? Why not borrow directly our friends in the States, the Nordics, the EU? Well, they were approached by the Icelandic government and Central Bank in 2007-2008 without any success. It basically means that the nations we consider friends did not trust the Icelandic political elite to wind down the problems without the oversight, checks and balances of the IMF.

That opens the doors to all sorts of conspiracy theories. Isn’t the IMF and other nations just after Iceland’s natural resources? Yes, the IMF still has some left-overs ideologies of the Washington Consensus, and its record in different areas of the world is worthy of all the criticism it deserves. But it did not need to come to Iceland. It was the Icelandic government which asked for its help after burning all other bridges to safety. And the fund is very adamant about the fact that it is here as an advisor. It is up to the Icelandic government to follow its advice. And when Steingrimur J. Sigfusson listens to the IMF then you know that other possibilities have probably been exhausted.

Let’s recap. The IMF is in Iceland because the nation’s democratically elected government asked for its help.

Without the IMF, Iceland would be closer to the I am legend economic landscape some were expecting in 2008. But such a disaster has been averted by its presence and the conditional loans it has facilitated from the very nations accused of evil intentions by those who prefer playing victims instead of facing reality.

When Ogmundur Jonasson, Lilja Mosesdottir and the rest of their followers in the Left Green party and the Independence Party are shouting for the departure of the IMF and against EU membership they are doing two things that are to the detriment of their nation. They are firstly biting the hands that currently keep it fed and are willing to help after an almighty havoc wrecked by the democratically elected political elite in Iceland. And secondly they offer no realistic, alternative options as far as future plans go.

The IMF is offering Iceland a lifeline, as is the EU by looking past the currency restrictions which are in breach of the four freedoms on which the economic cooperation of European nations are based on.  And despite what some may maintain, Iceland is not realistically a self-sustainable country which can go it alone. Alone it lacks the resources needed to benefit from its natural resources. Trawlers need oil and hydro-plants need steel. Any food made in Iceland costs the public considerably more than what is imported.

And someone must be willing to buy Icelandic products and trade with the country. Currently the bulk is with Europe, but you may guess twice whether Europe needs Icelandic trade more than Iceland needs European trade? Oh, and the money currently coming from the IMF…is provided by European countries, so far despite delays on the IceSave affair being resolved.

So Iceland needs the EU for stability in trade and currency. There are several more considerable benefits, but these far outweigh any other as they will help the fallen get back on its feet.

Alternative options of shelter being discussed in Iceland are interesting to say the least.

Some people seriously claim in public that they want to explore NAFTA membership, confusing it with the much more advanced form of the European Union.

Others want to crawl back into the arms of the United States, despite the total lack of interest of the US. Bilateral agreements with nations of overwhelming strength are favourable to corrupt regimes which divide and conquer the wealth it generates. It happened in Iceland before and those who benefited find it hard to let go.

So China is also being touted as a realistic option. And it makes sense in many ways for those who want to align themselves with rapid economic growth provided through dictatorship and less concern for human rights than the pesky EU.

Populist demagogue and still president Olafur Ragnar Grimsson, basking in his newfound glow of global debt fighter,  says on the news today that the stance of the Netherlands and the UK in the IceSave affair begs the question of what kind of club the EU is?

It is a club where different people gather to communicate with each other and look out for each others interests.

It is no wonder that such a concept is extremely hard for an Icelandic career politician to grasp.

By aligning Iceland with Europe, Iceland actually has a say in its future. Realistically its voice might not be as loud as Germany’s in the EU, but bi-lateral agreements offer small states nowhere near the clout which they get as fully fledged members of the EU.

That is why the public in Iceland needs the EU, even if it finds it hard to understand through the political noise.

Related posts:

1. Why Not NAFTA?
2. Situation in Iceland – The Fourfold Dilemma
3. FT: In The Same Boat

The award is called the Kjartan Gunnarsson Freedom Award and it was presented by the youth association of the Independence Party at the party’s headquarters.

Kjartan Gunnarsson you may recall was the CEO of the Independence Party who simultaneously sat on the board of Landsbankinn, the bank responsible for IceSave. You might also remember how the Independence Party government of David Oddson handed Landsbankinn to its preferable owners, Bjorgolfur Gudmundsson and Bjorgolfur Thor.  And you might not have forgotten about the 25 million ISK donation that Landsbankinn gave the Independence Party days before it enacted new campaign financing laws.

Amongst the guests, Independence Party MP Petur Blondal, the proud father of one of InDefence’s most active members.

It hardly gets more absurd than this crowd.

Related posts:

1. Independence Party = Enron
2. An Independence Party Split?
3. The Independence Party’s Successful Projection Of Baugur and IceSave

In classical psychology, projection is always seen as a defence mechanism that occurs when a person’s own unacceptable or threatening feelings are repressed and then attributed to someone else.

An example of this behavior might be blaming another for self failure. The mind may avoid the discomfort of consciously admitting personal faults by keeping those feelings unconscious, and redirect their libidinal satisfaction by attaching, or “projecting,” those same faults onto another.

Wikipedia

The first successful projection involves making people believe that anyone who criticises the Independence Party, especially the Social Democrat party and its followers, are somehow working on the behest of Baugur and its gang of corrupt businessmen.

But Baugur and its minions have never been more connected to any party than the Independence Party. Even if they might have paid for a couple of Social Democratic politicians like Steinunn Valdis Oskarsdottir and though a couple of others might have flirted with their money pits, it pales in comparison with the active involvement and donations Baugur has made within the Independence Party. One of the old dogs in the Independence Party spin machine, Bjorn Bjarnason knows this best as it was he who lost ground when Baugur backed young and eager gun for hire, Gudlaugur Thor Thordarson against him in the party’s primaries. And without Baugur, there would have been less of a bite behind FL Group whose donation of 30 million ISK in 2006 was initiated by Gudlaugur and accepted by then party CEO Kjartan Gunnarsson, the trusted ally of David Oddson and Geir Haarde who sat on the board of Landsbankinn.

But hardly a day goes by without an Independence Party member or supporter trying to pin Baugur onto the Social Democrats.

The other amazing projection is to convince large parts of the Icelandic public that IceSave is a problem which the nation can thank the Social Democrats and Left Greens for. By trying to conclude the agreements, this government has accepted the poisoned chalice of being targeted by the Independence Party for treason at any turn. This neglects the fact that the whole management and ownership team of Landsbankinn held their positions because of involvement in the Independence Party and of course donations to the tune of 25 million to the party from the bank in 2006.  That year coincidentally was the year when any sensible government would have stepped in to rein in the banks after harsh criticism of their business models from all over the world. But instead, IceSave was created, then the government neglected to install measures which would have lessened its eventual impact.

But hardly a day goes by without an Independence Party member or supporter yelling “treason” at the persons left cleaning up the mess.

Related posts:

1. InDefence Honored By Young Independence Party Members
2. The Independence Party Follows The Republican Way
3. Why Althingi Won’t Approve The IceSave Deal

I met Gerard Van Vliet in December 2009 after he contacted me because of this blog. He had found it extremely difficult to get anybody in Iceland to talk to him, be it officials or ordinary people. I met him over a coffee and then we had dinner. He raised the issue of a book.

In De Telegraaf I am titled as an investigative journalist. I am not a Bernstein or a Woodward sitting in an Washington Post-esque newspaper office in Reykjavik. A media outlet of such credibility has never existed in Iceland and will not for the foreseeable future. My experience as a journalist is based on working for the local paper when in high school in Iceland and then two and a half year as the school newspaper editor at my university in Florida. And then I write this blog when I get inspired, angry or desperate enough to have an opinion on the fall out of the Icelandic banking collapse.

My interests in IceSave stem from working for Kaupthing for four years and remembering very well the environment from which the online account sprung. And also from currently studying towards a master’s degree in International Relations at the University of Iceland.

We are trying to tie things together for people like ourselves to better understand what is going on. What you might not know but can get an idea of by reading the book, depending on which side of the ocean you are sitting is the situation of the other party. Gerard and I immediately struck up an understanding. But it appears as if politicians and officials in Iceland and the Netherlands have approached each other as pests that hopefully disappear if they keep their eyes closed for long enough. And the IceSave saga is not merely interesting from the viewpoint of international politics, but also from the local level.

While the media in the Netherlands has been constantly sending over reporters to cover the story, the Icelandic media has been inundated with comment from local politicians and “experts” who can toe the line of Iceland as a victim. In the end, the story is somewhat more complicated than a bunch of vikings heading over to steal innocent people’s money. There are corrupt politicians, rabble rousers, greedy bankers, Russian connections and lax international and local regulations which needs to be considered.

And what seems to be most constantly overlooked is the effect on ordinary people. Suicides, despair, bankruptcies and retirement plans out the window.

The book is in Dutch and will be published in the Netherlands in the autumn. We are preparing an international edition and courting suitors in the publishing sector.

Related posts:

1. You cannot just have it your way
2. Sunday Times Book Review: Meltdown Iceland: How the Global Financial Crisis Bankrupted an Entire Country
3. IceSave: Weapon Of Massive Debt And Destruction

Finally, there are many big unsolved problems that face the government and people of Iceland.

First, the Icelandic Krona is not a viable currency in the world of free movement of capital. The Euro seems to be the only solution. That requires a membership in the European Union. Becoming member is a long and winding process of negotiations and self analysis.

Secondly, the problem of the public expenditure alluded to above must be solved.

Thirdly, the dispute with the Brits and the Netherlands over the IceSave problem must be solved.

Forth, debt relief for families and firms must be concluded in a satisfactory way avoiding the making of zombi firms and zombi banks but without committing to much of the public budget. No small tasks for a government with thin majority and gross internal disputes.

Related posts:

1. Wikileaks Iceland: The Seriousness Of The Situation
2. The Drunk In The Pond
3. Financial Times: Iceland criticises IMF, UK and Dutch

A member of the fishing industry reform committee has wondered out loud whether the opposition’s silence on IceSave and the government’s sudden halt in fishing quota reform can be a coincidence? Finnbogi Vikar, who represents the Movement in the committee thinks that a deal might have been struck.

The opposition promises to let IceSave through.

The government promises to halt plans of reform in the fishing industry.

Did the commotion surrounding IceSave really revolve around local power struggles?

Could it be that the delays in concluding IceSave really revolved around special interest groups retaining their power and influence in Iceland? It will be interesting to follow the development of both IceSave and fishing industry reforms in Iceland in the next couple of years.

Related posts:

1. Why Althingi Won’t Approve The IceSave Deal
2. 2010 Forecast: Purchasing Power Could Be Down 31% From 2007
3. IceSave: Really About Domestic Politics In Iceland – UK & Netherlands

…apart from the UK and Holland not showing any signs of rushing into negotiating…

….nothing.

Related posts:

1. No Vote In IceSave Referendum
2. An MP Answers Why She’ll Vote Yes on IceSave
3. National Referendum: A Sad Day For Democracy in Iceland

Don’t be. Voters are illogical, as is evident by this excellent summary from an article in Time. They would even vote for the party which caused the biggest economic downfall worldwide in recent history:

With these acts of legislative sabotage, Republicans tapped into a deep truth about the American people: they hate political squabbling, and they take out their anger on whoever is in charge. So when the Gingrich Republicans carried out a virtual sit-down strike during Clinton’s first two years, the public mood turned nasty. By 1994, trust in government was at an all-time low, which suited the Republicans fine, since their major line of attack against Clinton’s health care plan was that it would empower government. Clintoncare collapsed, Democrats lost Congress, and Republicans learned the secrets of vicious-circle politics: When the parties are polarized, it’s easy to keep anything from getting done. When nothing gets done, people turn against government. When you’re the party out of power and the party that reviles government, you win.

From Time.com

It might have been a politically tactical mistake for the parties on the left to ask for an election in 2009. By taking the helm at this lowest point in Iceland’s history they have put themselves in the firing line, especially the Social Democrats who suffer the biggest damage.

Voters are strange like that. They’d rather blame the fire department than the arsonist if the fire is damaging enough.

And by delaying an IceSave solution, the opposition has cost the country dearly in lost recovery time. But the voters blame the government. That is the nature of the beast. This is fear and confusion at work.

But many of us who agree that this government is a better option than anything with the party which orchestrated the downfall have been really disappointed. Maybe things would be a little bit different if the Social Democratic / Left Green fire department had concentrated on putting out the fires in the bedrooms instead of the wine cellar?

Before the Independence Party has gone through reform and kicked the bad habits that are the fishing lobby and David Oddson’s isolationism, the Independence Party can not be allowed back into government. It would not necessarily be in their best interests to reclaim their seat in government until after the ghosts of the past have been exorcised. When that happens, the Independence Party will have moved significantly towards the spectrum where Social Democrat voters believe their party should be.

The most critical number in the poll for any of the parties, or any new parties which might be on the horizon are the 40% who are undecided. The government should remember that Clinton did win re-election two years later. Most people realised that their frustrations could bring them a Newt Gingrich / Bob Dole double act and weren’t quite so keen on that one.  But Iceland can not afford a repeat of what happened in 2000 in the US. The long term consequences of an unreformed Independence Party in government could be catastrophic.

Related posts:

1. The Essence Of Current Icelandic Politics (Borrowed from the US)
2. The Independence Party’s Successful Projection Of Baugur and IceSave
3. Longing For Another Kiss of Death

The Icelandic government’s economic advisor Tryggvi Thor Herbertsson, on a leave from his post as CEO of Askar Capital Investment Bank and two years after his whitewash report on the Icelandic economy with Columbia professor Mishkin, with some interesting promises to the BBC on October 4, 2008.

What happened next? The Independence Party’s voters elected Tryggvi as an Althingi MP.

Also in the beginning, a certain someone who says he tried to warn everyone about the impending disaster.

Related posts:

1. Finally Debt Relief…For Independence Party MP
2. For Iceland To Get Back On Its Feet Important Reform Is Needed Within Independence Party
3. An Independence Party Split?