Embassy suggested U.S. bail out Iceland to counter Russian influence

It seems to be Iceland day on WikiLeaks, with dozens of cables from the Reykjavik embassy dating back to 2005. Most of these are, as you might expect, fairly dull — I would imagine it’s tough to write a terrorist threat assessment on Iceland with a straight face — but the embassy’s response to Iceland’s banking collapse is interesting to read.

Particularly intriguing are a series of cables in which the embassy suggests the United States’ giving some sort of financial assistance to Iceland and expressing worry about Russia exploiting the crisis after Moscow offered a loan. Here’s a cable from late 2008:

Regarding the Russian loan offer, the PM asked at the press conference why Iceland shouldn’t call on the Russians if they could help? Despite public assertions that some of Iceland’s friends had failed to provide help, the Embassy does not believe the Icelanders have adequately checked out all possibilities of cooperation with U.S. entities. We urged Iceland reps to reach out to U.S. authorities immediately so that "our friends said no" – means they really asked the right questions.[…]

We are at a loss to explain why the Icelanders have not picked up the phone to discuss what they need and what we might be able to help them with, though the stature of Central Bank director David Oddsson may have something to do with a reluctance to open other lines of communication. American bankers here tell us that U.S. support is badly needed, that the Icelandic bank assets are not toxic, and that their problem is short term liquidity worsened by a crisis of confidence.

6. (C) The U.S. has strategic interests in the high north and a sturdy security relationship with post-Keflavik Iceland that both sides have labored to develop. Today the Embassy urged senior reps in the PM’s office and elsewhere to at least explore what confidence-building cooperation (other than the credit swaps the Fed turned down) may be possible to develop. We doubt that it would be  in the interest of the U.S. or NATO for the Icelanders to be beholden to Russia, however "friendly" the loan terms may be.

The Russia hands didn’t see this as much of a threat. A cable from the Moscow embassy that same week described the loan offer as a "vanity project," which suggested that the Russians had "still not come to terms … with the country’s rapid fall from economic grace."

Back in Reykjavik, the embassy made the case that the United States should offer economic assistance to Iceland as the banking crisis worsened: 

Assistance from the U.S. at this crucial time would be a prudent investment in our own national security and economic well being. The Icelanders take fierce pride in their flawless history of paying back their debt. Whatever the financial turmoil and uncertainty of the moment, it’s a good bet that this economy of highly-educated, imaginative, and sophisticated people will take off again. And when it does, and when the competition in the High North really gets underway, it may be more important than we can yet suppose to have the Icelanders remember us as the kind of friend who stands by in fair weather and foul.

Given the controversies surrounding the bank bailouts and TARP in the United States, a loan to Iceland would obviously have been a political non-starter, though obviously the United States did indirectly loan money to Iceland through the IMF.

The timing of WikiLeaks’ massive Iceland document dump is certainly interesting. Icelandic MP and longtime WikiLeaks supporter Birgitta Jonsdottir had her Twitter records subpoenaed by the U.S. Justice Department last week. The U.S. ambassador in Reykjavik was summoned to explain the matter. Additionally, WikiLeaks volunteer Jacob Appelbaum was detained and searched by U.S. customs agents recently after returning from the country. 

WikiLeaks role in exposing secret misbehavior at Iceland’s failed Kaupthing Bank was an early triumph for the site. Julian Assange lived in the country for a time and collaborated with Jonsdottir and other MPs on legislation aimed at setting up Iceland as an international data haven.