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Viewing cable 08REYKJAVIK253, ICELANDIC CENTRAL BANK ASKED NY FED FOR ONE BILLION USD LOAN

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Reference ID Created Released Classification Origin
08REYKJAVIK253 2008-10-29 14:02 2011-01-13 05:05 CONFIDENTIAL Embassy Reykjavik
VZCZCXRO8824
OO RUEHC
DE RUEHRK #0253/01 3031457
ZNY CCCCC ZZH
O 291457Z OCT 08  ZDK UR SVC #03389
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3867
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 02 REYKJAVIK 000253 
 
SIPDIS 
 
STATE FOR EUR/FO A/S Dan Fried 
 
E.O. 12958: DECL: 10/26/2018 
TAGS: EFIN ECON PGOV IC
SUBJECT: ICELANDIC CENTRAL BANK ASKED NY FED FOR ONE BILLION USD LOAN 
OR CURRENCY SWAP 
 
REYKJAVIK 00000253  001.2 OF 002 
 
 
Classified By: Economic Section Chief Fiona Evans for reasons 1.4 (b) 
and (d). 
 
1. (C) On October 24, the Central Bank sent a letter to the New York 
Federal Reserve Bank requesting a one billion USD loan or currency 
swap.  The Embassy requested and today received a copy of the letter, 
which was addressed to Timothy Geithner, President of the Bank.  In a 
cover memo dated October 28, the Central Bank emphasized to the 
Embassy the importance of a medium term loan or currency swap 
arrangements. 
 
2. (C) Although aware of existence of the letter, the Ministry for 
Foreign Affairs had not received a copy as of this morning and was 
uncertain as to its contents.  Benedikt Jonsson, Acting Permanent 
Secretary, told the Ambassador that the MFA was sensitive about 
making sure the correct USG authorities received the Icelandic 
request.  Jonsson told the Ambassador to expect a request from the 
GOI for a loan "through proper channels", perhaps as early as this 
afternoon. 
 
3. (C) Comment: The Government of Iceland is obviously struggling 
with problems of coordination and turf in dealing with the financial 
crisis.  Away for the first couple of weeks of the turmoil (due to 
brain surgery), the Foreign Minister is attempting to reassert her 
normal role in foreign affairs.  The Central Bank, however, is 
guarding its perceived prerogatives closely--and, judging from the 
events of the last few weeks, unwisely.  End Comment. 
 
4. (U) Begin Text of memo to Embassy: 
 
Please find attached the letter with Chairman David Oddsson sent to 
President Geithner of the Federal Reserve Bank of New York last 
Friday.  Please take note that even though the letter emphasizes the 
importance of a medium term loan, a swap arrangement could serve the 
same purpose, not least if there is understanding that it would be 
rolled over for a period of time that would be commensurate with the 
financing of the economic program of the Government. 
 
End Text. 
 
 
5. (U) Begin Text of letter to Federal Reserve: 
 
October 24 
 
Mr. Timothy F. Geithner, President 
Federal Reserve Bank of New York 
33 Liberty Street 
New York, NY  10045 
USA 
 
Dear Tim, 
 
Friday afternoon, October 24, 2008, the Government of Iceland 
announced that an agreement had been reached with the International 
Monetary Fund on a stand-by arrangement subject to IMF Executive 
Board approval which could take place early in the week of November 
3, 2008.  The details of the program will remain confidential until 
late next week.  For the program to succeed, financing beyond that 
provided by the IMF will be necessary. 
 
I refer to the discussions which we had towards the end of September 
on our request for a currency swap arrangement between the Central 
Bank of Iceland and the US Federal Reserve.  I also refer to the 
discussions which we had earlier in the year on the same subject.  As 
you explained to us, the main reasons for the Federal Reserve not 
wishing to enter into a swap arrangement with the Central Bank of 
Iceland were the relative size of the Icelandic banking system and 
then in September discussions the absence of an IMF arrangement.  As 
you are no doubt well aware of, the Icelandic banking system has now 
shrunk significantly.  Additionally, as mentioned at the outset, the 
Government has announced an agreement with the IMF on a standby 
arrangement.  For it to succeed, financing beyond that provided by 
the IMF will be necessary. 
 
I hereby request participation from the Federal Reserve Bank in the 
financing of the economic program.  Swap liens are short term in 
nature, but we need a financing commitment over a longer term 
horizon.  Because of this, the Central Bank ideally needs a loan from 
the Federal Reserve of a medium term maturity, preferably in an 
amount of 1 billion USD.  We are also seeking financing from other 
sources. 
 
I look forward to your prompt and favourable consideration of our 
request.  As always, I stand ready to provide additional information 
as needed.  Attached for your information is today's press release 
issued by the Government. 
 
Yours sincerely 
 
REYKJAVIK 00000253  002 OF 002 
 
 
Central Bank of Iceland 
David Oddsson, 
Governor and Chairman of the Board of Governors 
 
End Text. 
 
VAN VOORST