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, urgently required.

A letter along similar lines with the enclosure is being sent to the Minister of Finance and the Minister of National Defence.

Yours faithfully,
SIDNEY SMITH

[PIÈCE JOINTE/ENCLOSURE]

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 governments.

2. 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 economic problems.

3. 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.

4. 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 war.

5. 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.

6. 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.

7. 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.

8. There are a number of forms which a programme of Canadian assistance to Iceland might take:
   
   

   1. 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.

   2. 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.

   3. 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.

9. 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]