Just an update - harness fixed (and engine running again)
The 2.5 mm wires (high current) were changed to new tinned wires.
there were two 1mm wires which had their insulation melt over short length exposing the conductor (not due to them getting hot but due to adjacent wires that burnt), but since they are attached to the Amphenol round connector and I could not source new pins for that, I just cut the damaged length, replaced with 1.3mm tinned wires, soldered and heat shrinked the solder point.
two additional wires had the insulation melt very slightly so I just covered them with an additional layer of insulation tape.
One of the relay holders got really damaged from the heat - this I was able to get from the local Volvo dealer (although it is basically obsolete) together with the required crimp terminals.
The heaters relay contacts got fused - replaced with a new relay. At the moment I do not know what lead to what - was it the contacts that did not open and caused a non stop high current that lead to the wires burning or was it the heat generated by the wires due to corrosion that led to contacts fusing. One thing is almost sure according to what was left form the high current wires - they were badly corroded.