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Viewing cable 09REYKJAVIK30, ICELAND CENTRAL BANK CRISIS: ODDSSON'S NAILS FLAG TO MAST

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Reference ID Created Released Classification Origin
09REYKJAVIK30 2009-02-09 17:05 2011-01-13 05:05 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Reykjavik
VZCZCXRO6524
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHRK #0030/01 0401758
ZNR UUUUU ZZH
P 091758Z FEB 09
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 3980
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 02 REYKJAVIK 000030 
 
SENSITIVE 
 
SIPDIS 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN CVIS IC
SUBJECT:  ICELAND CENTRAL BANK CRISIS: ODDSSON'S NAILS FLAG TO MAST 
 
1. (SBU) SUMMARY. Iceland Central Bank's Chairman of the Board of 
Governors, David Oddsson, refused Prime Minister Johanna 
Sigurdardottir's request to resign on Sunday.  The Prime Minister 
made her request by letter of February 2, pending passage of a law 
allowing the government to dismiss the three governors.  The two 
other Board governors, Ingimundur Fridriksson and Eirikur Gudnason, 
also received letters.  Mr. Gudnason followed Mr. Oddsson and 
refused to resign, while Fridriksson agreed to step down.  The Prime 
Minister expressed extreme disappointment with Oddsson's decision, 
stating that the people of Iceland need new leadership in order to 
restore trust in the Central Bank.  END SUMMARY 
------------------------------------------- 
PM Calls for Central Bank Directors to Resign 
------------------------------------------- 
 
2. (SBU) PM Johanna Sigurdardottir sent a letter to the three 
Central Bank governors on February 2, asking them to hand in their 
resignations by February 6.  In the letter, the Prime Minister 
stated her desire to replace the Central Bank Board with a single 
new director under a proposed law reorganizing the structure and 
management of the Bank. The new bill, to be considered by Parliament 
shortly, would replace the tripartite board with a single director, 
appointed by the Prime Minister for a seven-year term. The Director 
position would be publically advertised and filled with an 
experienced banking professional with at least a master's degree in 
economics (Oddsson is a professional politician with no economics 
education). 
3.  (SBU) In addition, the proposed legislation would create a new 
Monetary Policy Committee within the Bank.  The Monetary Policy 
Committee would be comprised of five members: the Governor of the 
Central Bank, who would chair the committee, two of the Bank's 
executives responsible for formulating and implementing monetary 
policy, and two experts appointed by the Governor with the 
endorsement of the Prime Minister. The Monetary Policy Committee 
would make all decisions on the Bank's monetary policy control 
mechanisms. 
4.  (SBU) On February 6, Ingimundur Fridiksson sent his response 
stating his intention to resign.  Eirikur Gudnason declared his 
intention to stay on.  David Oddsson waited to February 8 to 
announce his decision to stay on, when a copy of his response letter 
to the Prime Minister was made public on the Central Bank of 
Iceland's website. 
---------------------------- 
David's Response: I Won't Go 
---------------------------- 
5.  (SBU) David's Oddsson's response to the Prime Minister was a 
scathing rebuttal to her request.  He said her letter was 
threatening, and accused the governing coalition of misconduct and 
biased conclusions.  Oddsson claims that he and the Central Bank 
Board of Governors were among the first to warn of the impending 
banking collapse, and pointed the finger at unnamed ministers whose 
motive for getting Oddsson out of the Bank is personal vengeance 
rather than "substantive fault with (his) work." Leaving little 
doubt as to his intentions, Oddsson defiantly concludes, "For my 
part, I have never abandoned any task that I have agreed to take on, 
and I do not intend to do so now." 
 
6. (SBU) On Sunday evening, the PM of Iceland issued a statement in 
response to Oddsson's letter, stating that Oddsson clearly did not 
share the government's opinion that appointing new employees to the 
Central Bank would increase the people's faith in the system.  She 
also stated her hope that the bill on the reorganization of the 
Central Bank would be passed quickly by Parliament. 
 
------------------------------------ 
Legal Authority for Dismissal Unclear 
------------------------------------ 
 
7. (SBU) The Prime Minister's legal recourse is unclear.  There is 
no custom or precedent to fire Central Bank governors.  Under the 
Law on the Central Bank on Iceland (2001), and according to the Law 
on the Rights and Duties of Civil Servants, however, it is possible 
for a governor to be "dismissed temporarily" if he has not been 
punctual, or has shown other negligence, disobedience to a legal 
request or prohibition from his superior, ignorance, or carelessness 
on the job.  In addition, he can be "dismissed temporarily" if he 
has shown unsatisfactory results, has been inebriated on the job or 
his behavior or actions [on the job] has otherwise been considered 
improper, inappropriate, or irreconcilable with the job.  It remains 
to be seen if the Prime Minister will try to use existing statutes 
to fire Oddsson immediately or wait until the Parliament's near 
certain passage of the new Central Bank law. 
8. (SBU) COMMENT.  Many believe the Prime Minister will wait until 
the new Central Bank legislation is enacted. The new legislation 
would automatically make the Bank Board positions redundant. 
Iceland's public continues to demand accountability and express 
their strong desire to clean house.  Editorials wonder why Oddsson 
refuses to leave when his very presence in the Central Bank does 
nothing but harm the international standing of the tattered 
Icelandic financial sector.  Oddsson may believe he played no role 
 
REYKJAVIK 00000030  002 OF 002 
 
 
in the economic crash, but many Icelanders (and much of the 
international economic press) hold the Bank - and Oddsson in 
particular - responsible for not curbing the banks.  Meanwhile, the 
public bickering between the Prime Minister and the Central Bank 
Director has done little to shore up international investor 
confidence in the country.  It is still an open question whether 
Oddsson has the political backing from the old guard Independence 
Party to withstand the demand of the public and government to step 
down.  Demonstrators, fresh from bringing down the previous 
government, have assembled again in front of the Bank.  END 
COMMENT. 
Van Voorst