A few weeks later the ambassador and Arias were again sharing concerns—this time about Micheletti’s intransigence. Arias worried that the regime was seeking to stall and delay and did not seem fully committed to reaching a deal. He suggested that the United States needed to increase the pressure on the business community and “consider taking away their visas and possibly freezing their bank accounts.” 72
On August 26, the embassy did something unprecedented. It stopped issuing U.S. travel visas to everyone in Honduras, with the exception of those seeking emergency care or permanent immigrants. This action took the conflict—and U.S. pressure for a resolution—to all Hondurans. Grandmothers hoping to attend weddings, students hoping to study at U.S. universities, and families hoping for a trip to Disney World were now out of luck.
Even that drastic step produced few concrete results. Zelaya roiled the country anew with his return to Honduras on September 20. When he took sanctuary at the Brazilian embassy, Micheletti’s team beefed up security, worried that Zelaya’s supporters would reinstate him by force. Ignoring international law governing the sanctity of embassies, the de facto regime turned off the Brazilian embassy’s water and electricity and surrounded the compound with security forces who assaulted people. The U.S. embassy had to step in and convince the regime to restore services and stand down. The Brazilian chargé described in graphic terms to his American colleagues what it’s like when a political refugee shows up at your embassy. He described the situation inside as tense, with Zelaya and one hundred and fifty supporters occupying most of the compound and running a well-organized political operation despite outside efforts to jam communications, and despite appeals from the Brazilian foreign minister to Zelaya to maintain a low profile.73
After a month of this, Washington dispatched the heavyweight team of Assistant Secretary of State for Western Hemisphere Affairs Thomas Shannon, Principal Deputy Assistant Secretary of State Craig Kelly, and National Security Council Senior Director for Western Hemisphere Affairs Daniel Restrepo. After exhaustive talks, the delegation obtained agreement from Zelaya and Micheletti to resume stalled negotiations, which culminated in the signing on October 29 of the Tegucigalpa/San Jose Agreement, which would have restored Zelaya and allowed him to finish out his term.74 The cable triumphantly describes it as “an historical reversal of a Latin American coup through peaceful negotiation. Work remains to implement the accord, but we believe the political will exists to do so.” This assessment turned out to be wildly optimistic. The embassy also announced that in a gesture of support for the agreement, it would reopen its nonimmigrant visa section.
Less than two weeks later, Craig Kelly was back in town, trying to put implementation back on track.75 It was clear that Micheletti was simply playing out the clock until the election. Kelly met with Zelaya (but according to the reporting cable not with Micheletti), and Zelaya maintained the upcoming election would not be valid without his reinstatement and declared he would call for a boycott. Kelly was back in town a third time a week later, and a more realistic Zelaya admitted there was no chance for his reinstatement before the elections. Kelly also met with business leaders close to Micheletti and urged them to pass on the message that he should step down. In this at least, the United States was compelling, and Micheletti agreed to take a “leave of absence” on the eve of the elections.
The prolonged and unresolved governance situation made for an uneasy election. Turnout was disputed, but it was probably between 45 and 50 percent. The embassy reported that “November 29 was a great day for Honduran democracy and the Honduran people displayed great civic commitment in expressing their will in the ballot box.” 76 In fact, few international observers saw this as a full return to democracy, largely because nothing about the coup had been resolved, rendering elections somewhat meaningless. The conservative candidate won, 56 to 36 percent. Even here, the country felt the weight of the embassy when the Supreme Electoral Tribunal (STE) results were delayed by the losing party, which had expressed concern that the preliminary results were not tallied correctly. “The Ambassador spoke to STE President and told him that in the interest of the country and of transparency to issue the results. He then called the losing candidate and urged him to drop his objection given the wide margin of his loss.” 77
This micromanagement of the election process suggests intervention can become a habit, and that by election day, the previous months of intense focus had so fixated the embassy on removing Micheletti that it was inconceivable to leave it to the Hondurans to muddle along on their own, or to accept anything less than a clear-cut outcome. Despite the celebratory tone of the cables, the United States won nothing. Zelaya was never restored to the presidency. Defiant to the end, Micheletti did not actually leave office until January 21, when he declared another leave of absence, this time for good.
The crisis ended with a whimper. Former president Zelaya flew off to the Dominican Republic the same day President Porfirio Lobo was inaugurated. Very few foreign presidents showed up for his inauguration. Even stalwart Arias demurred; he was disappointed that Lobo had not done more to get Micheletti to step down sooner. The rest of the world looked with suspicion on the election process; the U.S. view of it as relatively free and fair was not widely shared. Lobo inherited a country distracted by a climate of lawlessness that gave it the highest murder rate in the world. Human rights had grievously deteriorated. Honduras faced a long, slow path emerging from international isolation, and the country has yet to emerge from political polarization. The question remains whether the embassy’s energetic involvement in the coup aftermath ultimately served Honduran interests.
ICELAND’S OLD TESTAMENT ECONOMICS
To paraphrase Tolstoy, all prosperous countries are alike. But in the global financial crisis of 2008, each country pursued its own unhappy route to bankruptcy. The crisis affected so many individuals, industries, and countries that were it not for the fact that it was bloodless, it would easily dwarf all the political and natural disasters of this era combined. Ordinary people lost their jobs, their homes, and their pensions. Decades-old financial institutions evaporated overnight. Countries didn’t know what to do.
“Global” was an appropriate modifier for the crisis. One of the players needing rescue was Citigroup—an institution with more than 300,000 employees in more than 100 countries that handled $2 trillion of the world’s payments every day. Another, AIG, had 74 million policyholders in 130 countries.78 Suddenly these behemoths and many others, such as Bank of America, Chase, Merrill Lynch, Morgan Stanley, Bear Stearns, and Lehman Brothers, were being called financial death stars. Former Treasury secretary Timothy Geithner described what happened succinctly: “Borrowers took too many risks, creditors and investors were way too willing to finance those risks, the government failed to rein in those risks, and then was unable to act quickly or forcefully enough when panic hit.” 79
In the week of October 6, 2008, a distracted Washington watched the stock market tank in its worst week since 1933. The market dropped 50 percent from its 2007 peak. Deciding who to blame was a question for politicians rather than economists. Geithner used the phrase “Old Testament justice” to describe a strong public sentiment that the bankers who drove the system into the ground should be punished, not bailed out. Geithner, on the contrary, believed in government intervention. He argued that all financial crises are essentially about confidence, and while restoring confidence might have little to do with justice, the approach leaves everyone better off.
The crisis also wreaked havoc in Europe, where economies both in and outside the European Union are tightly linked. Europeans are in the habit of talking to one another, and there are plenty of mechanisms for high-level meetings and coordination. But what about the periphery—countries that are not members of the G-20 or the EU but were reeling from financial disaster all the same? These smaller ponds, in which U.S. embassies were major players, offered economic officers extraordinary access to finance ministers and other fiscal policymakers.
Embassy economics officers have a wide range of contacts, since they handle not only routine economic policy issues but also scientific issues such as energy, global warming, climate change, and environmental sustainability.
For an economics officer in 2008, almost no place in Europe was smaller or more interesting than Iceland. Its version of the global financial crisis was a strange mixture of incompetence, comeuppance, naiveté, and defiance, with a good measure of Cold War politics thrown in. Geithner’s Old Testament justice had a different meaning in a country that managed to be furious at Russia, Britain, and America all at once.
Iceland Gets “the Middle Finger”
The most oft-repeated slogan of this period, “too big to fail,” certainly didn’t apply to Iceland. With a population of 320,000, Iceland is barely large enough to be a city, let alone a country. Its GDP of $13.6 billion puts it on a par with retailers like Best Buy. It only became an independent country in 1944, and it’s often said that everyone knows everyone. In 2007 Iceland topped the UN charts as the best country to live in in the world—a status that vanished in the space of a week.
Embassies reflect the scale of the countries in which they work, and one remarkable aspect of the reporting from the small staff at Embassy Reykjavik is its thoroughness. In the run-up to the financial crisis, the embassy had been preoccupied with local reaction to a U.S. decision to close Naval Air Station Keflavik in 2006. Iceland, which has no military forces, was a charter member of NATO, largely because its location provided an excellent refueling point for bombers. This made it a pressure point in the Cold War, and the Soviet Union built a massive embassy in Reykjavik, widely assumed to be a listening post. The embassy description of the espionage atmosphere reads like a version of Spy vs. Spy. “It is believed that the Chinese are continuing to utilize their technical and humint [human intelligence] capabilities to conduct industrial espionage. It is also believed that the Russians are monitoring the Chinese actions. The current Russian DCM [deputy chief of mission] in Iceland is considered to be a China expert. The current Chinese ambassador to Iceland is a known U.S. expert. It is unknown if there is any targeting of the mission or any of its employees by the Russians or Chinese.” 80
Despite persistent Russian overtures, Iceland firmly planted itself in the West, but with some significant boundaries. Like Norway, Iceland resisted joining the European Union (although it is a member of the European Economic Area and the European Free Trade Association) largely because it wanted an unfettered hand running its fisheries industry. Icelandic ambivalence about EU membership continued through its financial crisis, when it began the formal entry process at its height, only to draw back in late 2013.
As is often the case, heady days preceded the economic fall. Egalitarian Iceland found itself transformed by a new class of billionaires and the attendant trappings: fancy cars, parties, yachts, and posh apartments in London and Manhattan. Iceland’s high interest rates attracted “hot” money from everywhere, bloating its banking sector to unsustainable levels. Ordinary Icelanders found they could get cheap loans in other currencies, allowing them to finance homes, cars, and vacations in yen, dollars, or pounds. Big-thinking entrepreneurs borrowed foreign currency to buy European boutiques, Eastern European telecommunication companies, a Danish airline, and—for more than $100 million—the West Ham United soccer team. “For the first time, one could have a career in Iceland as a bodyguard.” 81
As early as April 2006, the embassy reported that credit rating agencies and international financial firms had released “a torrent of reports raising questions about the state of the Icelandic economy and stability of Iceland’s major banks. This public doubt about solvency caused a marked drop in the value of the Icelandic krona and of shares on the Icelandic stock exchange.” The embassy warned that rating agency Fitch had raised concerns in February, followed by Moody’s and Standard & Poor’s. “The various reports run the gamut from concluding that the Icelandic financial sky is falling to the view that despite a few economic indicators being out of balance, the Icelandic economy is sound and the negative prognostications wildly exaggerated.” 82
The cable laid out the facts: Iceland carried a large current account deficit, high inflation, high personal indebtedness, and high levels of short-term foreign debt carried by Iceland’s three major banks. But the embassy wasn’t certain any of these risky practices were fatal. It argued that much of the debt was caused by three huge capital investments—two aluminum smelter projects and a massive hydroelectric power plant, developments that would on the whole be good for Iceland.
Fourteen months later, in a June 2007 scene setter for visiting Under Secretary Nicholas Burns, the embassy swung into cheerleading mode. “You’ll see ample evidence of a continuing economic boom in Reykjavik, thanks to utilization of fish and energy resources and leveraging of assets to invest abroad. The Viking spirit of risk taking, acquisition, and swift decisiveness have all helped multiply Icelandic holdings in Europe.” 83 This tendency to equate national character with economic success and failure would appear again in embassy financial reporting from Greece, Spain, and Italy, when Germans, among others, blamed the economic collapse on their colleagues’ character traits.
Icelanders themselves were happy to capitalize on their Viking reputation when it suited their narrative. The country’s president described Iceland’s new generation of investors as “having qualities we have inherited from our ancestors,” and said that “those who venture out into unknown territory deserve our honor.” 84 Prime Minister Sigmundur Davíð Gunnlaugsson, whose term followed the worst of the crisis, said, “Icelanders, as descendants of the Vikings, are highly individualistic and have difficulty putting up with authorities, let alone oppression.” 85 This streak of independence (some might say stubbornness) made it difficult for Icelanders to deal effectively with the international financial community, as the embassy noted.
Six months before the crisis broke, the embassy warned Washington that Iceland’s economy had “gone wobbly,” with currency depreciating to near record lows and price hikes of 10 percent in a country in which most consumer goods are imported. The central bank’s prime interest rate rose to 15 percent. The prime minister unhelpfully blamed foreign investors and said Iceland would consider “setting a bear trap” to punish them.86 The casting about for a scapegoat would become a constant theme as the crisis worsened week by week.
By the end of September 2008, the post reported that the Icelandic krona’s value had fallen almost 50 percent since the start of the year; inflation had reached 14.5 percent, and Icelanders were clamoring to adopt the euro. The government, seemingly for lack of any better ideas, bought 75 percent of the shares of Iceland’s third-largest bank. “This is the first significant government intervention for the Icelandic economy during the recent crisis and comes after a week of harsh criticism for perceived inaction—in particular, for not managing to include Iceland in the 24 September exchange agreement between the U.S. Federal Reserve and the central banks of other Nordic countries.” 87 The Fed had made $30 billion available to Denmark, Sweden, Norway, and Australia to ease money markets and improve global liquidity.
By October 7, it was clear that the government intervention was too little too late. A team from the International Monetary Fund (IMF) arrived at the invitation of the prime minister, who somberly addressed the nation on television about a series of emergency actions. The embassy duly noted that “he closed his address with ‘God Bless Iceland,’ a phrase rarely used by politicians here.” 88
At this point Russia injected an interesting East-West gambit into the mix, offering a €4 billion loan. The embassy reported that officials angrily said Iceland had no choice but to turn to Russia. They claimed their “friends” in the West had let the country down. Acting Foreign Minister Össur Skarphédinsson took off the gloves in a morning radio interview. “He said it hurt, and added that after about 50 years of a special relationship with the U.S., the only thing Iceland got now was the middle fing
er.” 89 The chairman of the opposition Progressive party piled on, saying President Bush did not turn out to be a friend when needed, and asked Parliament to send Russian president Putin a thank-you note.
Why did Iceland feel America had let it down? Could it be, the embassy wondered, because they actually had not called Washington? It reported, “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 representatives to reach out to U.S. authorities immediately so that ‘our friends said no’ means they really asked the right questions.” 90
The embassy, clearly irked by the “middle finger” quote, worked overtime to resolve the question of why Iceland felt abandoned. In a separate cable the same day, the embassy reported that it was trying to determine “with whom the Icelanders spoke in the U.S. and supposedly approached for help in their ongoing financial crisis.” It turned out that, apart from earlier talks with the New York Fed, no one in Iceland’s government had spoken to any U.S. official for more than a week! Worse still, the embassy’s source, a senior Central Bank official, said that the Central Bank had not spoken with anyone at the U.S. Treasury Department other than the Iceland desk officer. 91
The embassy went to work. Here was a country in over its head, which did not have the right phone numbers and had not sorted out how to work through a global financial crisis with U.S. financial institutions. The next day the embassy reported it had brokered a deal with the minister of finance, who was on a plane to Washington. “Post persuaded the Minister to agree to meet with senior Treasury officials while in the U.S. . . . We would hope this meeting will help Icelanders think through the present crisis and move from a stopgap reactive approach . . . It should also make clear to them how the U.S. can and cannot be of assistance and point them in the direction of other options.” 92
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