; they are not under the control of the government. the government has a majority stake in only one of the new banks. others have claimed that iceland defaulted and got away with it. the opposite is true. the credit of the sovereign was preserved, and all debt obligations have been paid on time. this is why the sovereign has been able to tap international capital markets twice so far since the crisis struck, and why its five - year cds spread is currently below 180 points. why did the government give a verbal blanket guarantee for domestic deposits only and not for deposits in the banks ’ foreign branches? after all, this distinction probably added fuel to the fire of the so - called icesave dispute about the settlement of deposit guarantees in landsbanki ’ s dutch and british branches. the short answer is that such a guarantee would never have been credible. as a result, it would not have stopped the run on these deposits and, if attempted, might have bankrupted the government. at the time, the central bank of iceland ’ s fx reserves amounted to 2½ billion euros, while the foreign currency deposits in landsbanki ’ s dutch and british branches totalled 11½ billion euros and payment of the eu minimum deposit insurance would have required 4½ billion euros. the sovereign was completely closed off from foreign capital markets at that point. furthermore, in economic terms, given that these deposits were used to a significant degree to finance illiquid assets in these same countries, such a payment, if possible, would have amounted to a net transfer of resources from iceland to these countries at a time when iceland was going through its deepest financial and economic crisis in the post - war period! that made no sense. this case also highlights the link that must exist between the lolr function and deposit insurance, which, in the absence of clear prior arrangements for currency swaps or another such mechanism, must be mostly in the same currency in order to work. the eu framework for this was therefore deeply flawed, as is currently being recognised in the plans for a banking union. bis central bankers ’ speeches why were these huge risks in the icelandic banking system allowed to build up? i do not think we yet have the research and the consensus to provide a reasonably undisputed list of the main causal factors in this process ; however, i think four factors will rank highly on that list. these are iceland ’ s membership in the european economic area ( eea ) in 1994, privatisation of the icelandic banking system

sigurðsson was appointed governor from october 1, 2003. he therefore served on the board of governors for almost three years. before that he was a member of the supervisory board for just over two years. on behalf of the supervisory board i would like to thank jon sigurðsson for our pleasant work together during his terms as both a member of the board of governors and a member of the supervisory board. ingimundur friðriksson was temporarily appointed governor from june 15 to august 31, 2006, then appointed governor for a seven - year term from september 1, 2006. ingimundur friðriksson had been assistant governor since 1994 and held a temporary appointment as governor for one year from 2002 to 2003. a number of changes took place in central bank staffing during 2006. fifteen employees left or retired from the bank and ten were hired, so their number decreased by five during the year. at the end of 2006 there were 111 employees at the central bank of iceland, while the number of full - time equivalent positions was just over 102. among the retirees was sveinn erling sigurðsson, director of the statistics department. lilja steinþorsdottir left the post of chief auditor during the year. the chief auditor is directly accountable to and appointed by the supervisory board. on behalf of the supervisory board i would like to thank lilja steinþorsdottir for our pleasant work together. in her place, the supervisory board appointed stefan svavarsson chief auditor. financial institutions compete fiercely for talented employees, which is not surprising given the pace at which the icelandic banks ’ activities have expanded. it is vital for the central bank to have as capable employees as possible in its service. it must take prevailing conditions into account to ensure that this is the case. on the supervisory board in 2006, olafur g. einarsson resigned from the post of chairman which he held since 1998. helgi s. guðmundsson was elected chairman in his place. on behalf of the supervisory board i would like to thank olafur g. einarsson for his particularly successful leadership during his years as chairman. the supervisory board held 22 meetings during the year. i would like to thank the members of the supervisory board for their pleasant cooperation and fine work. i also thank the board of governors and employees of the bank for their very good work during the year and fruitful collaboration with the supervisory board.