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### Viewing cable 09REYKJAVIK20, ICELAND: GOVERNMENT FALLS, UNITY COALITION IN THE OFFING?

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09REYKJAVIK20 | 2009-01-26 18:06 | 2011-01-13 05:05 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Reykjavik

`

    VZCZCXRO5325
    OO RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
    RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
    DE RUEHRK #0020/01 0261815
    ZNR UUUUU ZZH
    O 261815Z JAN 09
    FM AMEMBASSY REYKJAVIK
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 3963
    RHEHAAA/WHITEHOUSE WASHDC IMMEDIATE
    INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
    RUEKJCS/SECDEF WASHDC
    RUEATRS/DEPT OF TREASURY WASH DC
    RUEAIIA/CIA WASHDC
    RUEKDIA/DIA WASHDC

` `

    UNCLAS SECTION 01 OF 02 REYKJAVIK 000020

    SENSITIVE

    SIPDIS

    STATE FOR EUR/NB, INR-B
    OSLO FOR DATT
    DOD FOR OSD-P (FENTON)
    TREASURY FOR LAWRENCE NORTON AND ERIC MEYER

    E.O. 12958: N/A
    TAGS: PGOV PREL ECON IC
    SUBJECT: ICELAND: GOVERNMENT FALLS, UNITY COALITION IN THE OFFING?

    Refs: A) Reykjavik 012
      B) Reykjavik 013
      C) Reykjavik 015
      D) Reykjavik 017

    ¶1. (U) Summary:  Despite a weekend of frantic efforts by the leaders
    of Iceland's governing coalition to bring their parties to heel,
    Prime Minister Haarde announced January 26 that the governing
    coalition has fallen apart less than two years into its term.  The
    immediate cause was the demand of the junior party, the Social
    Democratic Alliance, that the Haarde's Independence Party (IP) yield
    the Prime Minister's seat and make other concessions.  While Haarde
    wants to establish a unity government with the IP at the head, there
    is considerable doubt that he will be successful.  President
    Grimsson will meet with the heads of all the parties prior to giving
    one the mandate to form a coalition.  Many expect the SDA to be
    tapped.  Early parliamentary elections are expected.  End Summary.

    A Last-Ditch Effort Fails
    -------------------------

    ¶2.  (U) After Prime Minister Geir Haarde's dramatic announcement on
    January 23 that he has been diagnosed with cancer and that his
    Independence Party would call for early elections in May (ref D),
    the stage was set for a weekend of furious negotiation between the
    heads of the governing coalition.  Haarde held several meetings over
    the course of the weekend with Social Democratic Alliance Chair and
    Foreign Minister Ingibjorg Solrun Gisladottir to discuss the future
    of the government.  Adding to the drama, on January 25 Minister of
    Commerce Bjorgvin Sigurdsson (SDA) announced his resignation as well
    as that of the entire board of the Financial Supervisory Authority
    (FME).  Sigurdsson said he hoped to take some responsibility for the
    banking collapse, while also pointedly suggesting that the Board of
    the Central Bank should consider doing the same.

    ¶3.  (SBU) On January 26, the IP and SDA chairs met with their
    respective parliamentary caucuses to brief on the weekend's
    negotiations.  The rumored outlines of the SDA's offer: in order to
    keep the coalition alive, the IP needed to fire Central Bank
    Chairman David Oddsson and the rest of the Board; agree to spring
    elections; and yield the Prime Ministry to an SDA designee.  By most
    accounts, the third point was a bridge too far:  the Political
    Advisor to the Minister of Finance (IP) told PolOff that his boss
    went into today's meeting willing to yield on the other requests,
    but that the IP would rather walk than surrender the Prime
    Minister's seat to its junior partner.

    ¶4.  (U) Just after midday, PM Haarde announced to waiting press that
    the Independence Party had been unable to agree to the SDA's
    demands, and that the coalition would dissolve.  While thanking SDA
    Chair Gisladottir for her warm and honorable collaboration over the
    last two years, Haarde had harsh words for the SDA and its "lack of
    courage" to press forward with the coalition.  He added that the SDA
    demand for the Prime Ministry was a nonstarter and that it should
    have been obvious to the SDA that this would never be accepted.
    Referring to the urgent work awaiting the government as it
    implements the International Monetary Fund's recovery program (ref
    C), Haarde said he hoped to assemble a unity government under IP
    leadership.

    ¶5.  (U) Haarde met with Icelandic President Olafur Ragnar Grimsson
    at day's end to formally relinquish his mandate to form a
    government.  Grimsson will now meet with the heads of the country's
    other political parties, after which he will give one party the
    mandate to assemble a coalition.  Many expect that he will choose
    Gisladottir's SDA, given Grimsson's previous political career in one
    of the parties that combined to form the SDA.

    What government next?
    ---------------------

    ¶6.  (SBU) Iceland will without a doubt see parliamentary elections
    in the coming months, two years ahead of schedule.  The opposition
    parties, surging in polls as a result of popular displeasure with
    the government, will want to lock in their gains at the ballot box,
    and the outgoing government parties will want a chance to present a
    new face to the public.  However, in the interim a caretaker
    government will most likely be established, and two possibilities
    are getting the most discussion:  a unity government with all five
    parties in the Althingi, and a leftist minority government with the

    REYKJAVIK 00000020  002 OF 002

    pledged support of the Progressive Party.

    ¶7.  (SBU) On first reading, a unity government seems more likely,
    given that all parties have now stated their desire for one.
    However, such an agreement may be unattainable due to severe policy
    conflicts between the IP and the Left-Greens.  The Left-Greens (and
    others) would be likely to object to a unity government under IP
    leadership, given the current discontent with the government.
    Beyond that, however, the Deputy Chair of the Left Green Movement
    told PolOff just before the government fell that the Greens would
    not come into government "just to be there.  We have policy concerns
    that we want to see addressed," such as renegotiation or outright
    cancellation of the IMF loan and changes to the tax structure for
    corporations and individuals.  IP stalwarts such as a leading
    investment banker have told EconOff that these moves are exactly
    what the IP -- and the broader business community -- fear.  Such
    basic conflicts may make it impossible for the IP and the
    Left-Greens to be in the same government, even a caretaker unity
    government.

    ¶8.  (SBU) A minority coalition between the Left-Greens and the SDA
    would also pose problems.  Though the new Progressive Party (PP)
    chair has pledged to support such a minority coalition, the three
    parties disagree on a number of issues (such as EU membership).  The
    SDA has also been a strong backer of the IMF bailout plan, which
    could hinder SDA-LG cooperation just as it would a unity
    government.

    ¶9.  (SBU) COMMENT:  Despite the unclear political situation and
    limited options for a new coalition, all parties agree that there is
    little room for delay.  The Left-Greens want elections earlier than
    all other parties, but all want to vote sooner than later.  We
    expect that a caretaker coalition, if there is to be one, will be
    announced in the next few days, and will carry with it a date for
    spring elections.  Failing that, we expect President Grimsson to
    announce the Althingi's dissolution and elections to follow within
    45 days, as specified by the constitution.

    VAN VOORST

`