My dear Prime Minister:
Discussions have been taking place for some weeks in Paris among a group of NATO
countries concerning emergency financial assistance to Iceland.
The present position of these discussions is summarized in the attached draft memorandum
to the Cabinet, which, in its conclusion, recommends that Canada should participate, along with
the United States and West Germany, in providing a loan to Iceland. The proposed Canadian
contribution might be of the order of one and one half million dollars.
The security of Iceland is a matter of general NATO interest, but Ithink is of particular
concern to Canada. As you will note from the attached memorandum, Canada is one of the three
countries from which the Icelandic Government would prefer to receive assistance. In view of
the large Icelandic community in Canada, it is perhaps natural that Iceland should look to
Canada in this emergency.
If you agree, Ishould like to bring the matter before Cabinet at an early date, since the
Icelandic Government's financial difficulties have reached so critical a stage that it must decide
very soon whether to accept an offer of Soviet assistance. A Canadian decision is, therefore,
A letter along similar lines with the enclosure is being sent to the Minister of Finance and
the Minister of National Defence.
Note pour le Cabinet
Memorandum to Cabinet
SECRET Ottawa, October 23, 1957
ASSISTANCE FOR ICELAND
The Canadian Government has been approached by the Secretary General of NATO with a
request to provide emergency economic assistance to Iceland in concert with some other NATO
The Secretary General first became seized of this question in July when the Icelandic
representative informed him that the Soviet Union had offered his government a long term loan
of $25m., repayable over 20 years at 2%, and a shorter-term credit of $3m. According to word
received from our NATO Delegation on October 22 the amount of the proposed long term loan
offered by the Soviet Union has now been increased to $32m. The supplementary $3m. credit
would be earmarked for the construction of twelve fishing vessels in East Germany, and would
be repayable in Icelandic exports to the USSR. There have been several meetings between M.
Spaak and representatives of a number of NATO countries, including Canada; in addition, two
senior economists from the International Staff have visited Iceland to report on the situation first
hand and to device possible measures of immediate assistance. The OEEC is conducting a
longer-range study of the situation with a view to recommending solutions to the fundamental
From the investigation conducted under M.Spaak's direction, it has been clear that Iceland
requires immediately a minimum of $8m. to meet pressing obligations for the construction of a
cement factory, rural hydro-electric schemes and loans to fishermen and farmers. An additional
$1m., required to purchase motors and gear for the fishing vessels being constructed in East
Germany, can, it is believed, be provided in the form of commercial credits by Western
European members of NATO.
There are strong arguments of a politico-military nature in favour of helping Iceland to
overcome its immediate financial difficulties and avoid the acceptance of Soviet aid. The
security of the island has great importance for Canada and for other members of the Atlantic
Alliance: the country is a natural link in sea and air communications between North America and
Europe and an essential linch-pin in the extension of radar lines between the two continents.
Because of its geographical position Iceland is a key point for the defence of NATO countries
against air attack, for the safe convoy of supplies by sea and for the movement of defensive
fighter aircraft from North America to Europe. There is no doubt that the defence of member
countries of NATO would be seriously threatened if these facilities were unavailable in time of
Quite apart from its current financial difficulties, Iceland's political position within NATO
cannot be considered satisfactory. Over 30% of the country's foreign trade is with Iron Curtain
countries, which places it in a position of vulnerability to Soviet pressure. Furthermore, the
Communist Party polled 19% of the vote in the last election and in consequence has two
Ministers in the present coalition government.
Iceland's current economic difficulties are not unique and are essentially the result of an
overly ambitious programme of investment pursued since the war; according to information
provided by the NATO International Staff, investment of various kinds has absorbed about 30%
of postwar national product and has included an exceptionally large proportion of housing in
Rejkavik. Successive governments since the island's separation from Denmark have attempted to
diversify the economy so as to reduce dependence on fish exports, through development of the
very sparse natural resources (such as hydro-electric sites). In proportion to its population the
country is large and like Canada must incur large expenditures on overhead in transport and
communications, particularly when an attempt is being made to modernize them rapidly. All
these developments have achieved encouraging results but since they were overly ambitious they
have imposed a strain on the budget and the balance of payments and have caused acute wage-price inflation.
Five countries, the United States, Italy, Norway, Denmark and Germany have expressed
willingness to participate in a multilateral NATO loan to Iceland, while France and the United
Kingdom have indicated that they might be able to grant commercial credits. Italy and Norway,
however, were contemplating loans of only approximately $250,000 each while Denmark's
possible participation, though not specified, would probably be on an even smaller scale. The
Icelandic Government considered that the assistance to be provided by these countries would
total so small a sum that it would not justify the adverse publicity (and its effect on the country's
credit standing) that would result from discussion of the island's economic problems in the three
parliaments concerned. They therefore indicated to M.Spaak that they wished to make bilateral
arrangements with not more than three countries, i.e. United States, Germany, and Canada. The
most recent word from Washington is that the United States would be prepared to match any
assistance provided by other governments, i.e. provide $4m. of the suggested total of $8m. The
German Government has indicated its willingness to make available D.M. 71/2m. or $1.8m. and
efforts are being made to have it increase this offer to perhaps $3m. If Germany is in fact
prepared to offer $21/2m. Canada should consider making available $11/2m. if the NATO
objective of an $8m. loan is to be met.
There are a number of forms which a programme of Canadian assistance to Iceland might
Consideration might be given to assisting Iceland commercially, i.e. by trying to encourage
the import of more Icelandic goods or by providing export credits. Although Canada has
imported very small quantities of fish from Iceland, there is no possibility of providing
assistance through an increase in such imports. There is also little possibility of assisting Iceland
merely through export credits insurance coverage of commercial bank loans since there is little
scope for providing Canadian goods or commodities. We understand in particular that there is no
possibility of Iceland taking Canadian wheat or flour.
An alternative might in principle be an outright grant of assistance as a special form of
Mutual Aid. Action of this kind would require amendment to existing Mutual Aid legislation
which only authorizes assistance for military purposes and Iceland has no armed forces.
Furthermore, a grant under Mutual Aid would take the form of quasi-military items, whereas
what Iceland needs is cash in the form of a loan.
A long or medium term loan is the only satisfactory means by which Iceland's needs can be
met. In discussing the matter with M.Spaak, the Icelandic representative has spoken of a loan at
normal interest rates and has never suggested that NATO countries should attempt to match
the terms of the Soviet offer. The precise terms would be the subject of negotiations between the
Icelandic Government and the lending countries but it is to be expected that they would be
comparable to those of loans by the International Bank, i.e. in the neighbourhood of 4%. There
are at present no funds available for such a loan so that a new parliamentary vote would be
required. This could be so worded as to indicate that it is for a NATO country which is not
eligible for Canadian Mutual Aid, in order to preclude other NATO countries seeking economic
assistance on the same basis.
In conclusion it would appear that the possibilities of assistance to Iceland are really limited
to a government loan. In view of the urgent need to help Iceland overcome its present difficulties
without recourse to Soviet aid, it is recommended that approval be given in principle to the
making of a loan of up to $1.5m. on terms and conditions to be negotiated with Iceland and
which would be approximately the same as those to be negotiated between Iceland and other
participating NATO countries.
56 Note marginale :/Marginale note:
Seen by P[rime] M[inister] Oct 29 HB R[obinson]