of the past years has not yet fully shown through. initial fiscal consolidation is thus unlikely to change the picture of an economy on a slow recovery path. the fiscal challenges are now so daunting that consolidation is necessary in the coming years if we are to avoid an untenable increase in government debt. there is no avoiding it – even if there is still a great deal of spare capacity in the economy. add to this the erosion of wage competitiveness, strong pressures on expenditure, a heavy tax burden, low productivity increases and a limited job supply. the danish economy is facing serious challenges far beyond cyclical factors. and now over to mortgage credit. the international financial crisis has demonstrated that there is a need for financial institutions having bigger capital buffers and larger and more stable liquidity reserves. events deemed very unlikely by risk management models did actually occur. international work is going on in order to formulate and agree on new rules addressing the problems unveiled by the crisis. it is important to reach agreement across national borders and continents, so that the conditions for financial business are largely the same irrespective of the location. for denmark, it seems that our unique mortgage credit system can be facing challenges that we will have to deal with more or less on our own. it is therefore important that we carefully consider where to concentrate our efforts to have the new rules adjusted to our special conditions. here i will focus on the most essential aspects as we see them today. the liquidity regulation proposals include a classification of assets based on how liquid they are. government bonds and claims on central banks, international organisations etc. are considered fully liquid, while corporate bonds and mortgage - credit bonds can only be included up to a maximum of 50 per cent. finally, there are some assets that cannot be included. denmark will seek to have mortgage - credit bonds included in the stock of fully liquid assets, provided their liquidity is comparable with that of government bonds. liquidity – also in stressful situations – should be the crucial point. we believe that we can prove that danish mortgage - credit bonds are highly comparable with government bonds. and that ’ s what we intend to do. another aspect concerns adjustable - rate mortgages specifically. during the financial crisis, financial institutions generally saw their funding sources in the market drying up. this was the reason why many governments found it necessary to issue state guarantees to financial institutions. the rules now on the drawing board therefore pose requirements on stable funding. the definition of stable funding implies that

in both directions, thereby contributing to the difficulties we are now facing. danish house prices showed an almost constant upward trend from 1993 to 2007, particularly in 2005 and 2006. until 2005, growth in property prices during the most recent upswing was to a large extent attributable to low interest rates – especially at the short end of the curve – deferred - amortisation loans, higher disposable incomes, falling unemployment and the tax freeze. but the trend became self - fuelling. in the expectation that prices would continue to rise, new homes were purchased before the old ones were sold. property became an object of speculative investment. driven by expectations, combined with the economic upswing, prices of single - family and terraced houses soared by almost 25 per cent within one year from early 2005. the increase was even stronger in the copenhagen area. a hike of that magnitude cannot merely be explained by the underlying economic conditions. expectations also played a role. the rising property prices added fuel to the upswing. home equity increased, and consumers gained extra purchasing power. we witnessed a strong expansion in construction activities, with clear signs of overheating. and last, but not least, lending growth was particularly strong for banks with large - scale commitments to the property sector. it is characteristic that in the shadow of property - market developments activities took place that are now being investigated by the danish fraud squad. the rollback of these imbalances has amplified the impact of the international recession. declining property prices have not only affected the building and construction sector, but have also exacerbated the fall in consumption when compared with other countries. as regards the financial sector, it is worth noting that the ailing banks are primarily found among those that previously displayed the most aggressive lending policies in the property market. what does this tell us? in a market economy, crises can never be avoided. we must accept economic downturns from time to time. as a small, open economy we cannot guard ourselves against a sudden drop in external demand, reducing exports by almost 20 per cent in six months, as we have witnessed. but we can seek to conduct economic policy that does not in itself amplify economic fluctuations. we have not been good at that. during the upswing, our economic policy was procyclical, contributing to the upward trend. too little was done to curb it. you might say that we put the economy into a higher gear in a situation when it was