thing is clear, however : for a period of time, we will need to maintain larger foreign reserves than we currently do. * * * the resurrection of the financial system is well advanced, and the capital base and ownership structure of the new banks have been determined. the next step is to complete the financial restructuring of the savings bank system. the minister of economic affairs has presented a bill of legislation on financial undertakings, which addresses a number of the shortcomings that emerged in their operations during the run - up to the crisis, including large exposures, related party lending, and owner eligibility. a number of projects must be tackled afterwards. the banking system is still too large for domestic needs. our financial institutions are operating in the shelter of capital controls, and the future arrangements for their links to foreign financial markets are still undetermined. furthermore, many domestic financial institutions have sizeable currency mismatches between their foreign assets and liabilities. this is risky and increases their need for capital. the financial institutions themselves will have to work diligently in order to reduce the imbalances in their currency composition, but because the hedge market is not functioning properly at present, it is possible that the central bank might assist them in repairing their foreign exchange balance through swaps with institutions that have an opposite mismatch. in addition, the bank will soon review its precautionary rules on financial institutions ’ liquidity and foreign exchange balance, in light of recent events. the central bank of iceland has collaborated with savings banks and the ministry of finance on a solution to the recapitalisation of the savings banks. the solution involves settlement of a large portion of the claims that the central bank received as compensation for deposits transferred to it, in accordance with the decision of the financial supervisory authority ( fme ) on the disposal of assets and liabilities of sparisjoðabanki islands hf. ( spb ) in march 2009. the settlement of the compensation has not been finalised, however, and the matter is still being considered by the financial supervisory authority. the central bank has concluded agreements with eight savings banks concerning the settlement of claims, and the agreements will be finalised soon after the financial supervisory authority and other creditors have confirmed them. i realise that it is painful for guarantee capital owners and creditors to lose these assets, which were deemed quite valuable before the crash and were perhaps purchased recently with borrowed money. nonetheless, it is necessary to face facts and try to salvage the

be withdrawn in the next 12 months, there are 1. 4 billion euros left. this is sufficient to cover the instalments that must be paid on the treasury ’ s foreign loans in the winter of 2011 – 2012, which total 1. 4 billion euros. but the foreign exchange reserves would then be exhausted, and the situation would be difficult, to say the least. on the other hand, this will not be allowed to happen. in my opinion, if such a situation appears imminent, we must take action according to plan b, which i discussed earlier. in addition, it is highly likely that we will be successful in realising some of the foreign claims held by central bank of iceland asset management. i would like to take this opportunity to announce for the first time that, in recent months, the central bank has purchased, on the secondary market, bonds from the series maturing during the winter of 2011 – 2012. the purchase has a nominal value of 116 million euros and was executed on favourable terms. because of this transaction, the reserves can now cover the loan payments. furthermore, it will end up reducing the treasury ’ s foreign debt at lower expense than would have been achieved otherwise. if we gain access to the remainder of the loans from the imf and the nordic countries, it will be possible to strengthen the reserves by another 2½ billion euros. the reserves would then amount to 3. 9 billion euros, almost half of gdp and nearly 21 months ’ worth of imports, before the loan payments. of course, this is a much larger reserve fund than we need for the long term, and it will be costly. for this reason, we will continue to refine our projections of how much, and when, we need these supplemental loans. in this context, we must also bear in mind that we will only need maximum foreign reserves for a short period of time, while we are setting the stage to lift the capital controls and getting beyond these large loan instalments. the central bank has decided, in connection with its macroeconomic forecast this coming may, to prepare a new balance of payments estimate for next year, as circumstances have changed somewhat since the last such estimate was prepared in connection with the imf economic programme. then it will be easier to assess what kind of pressure instalments and interest payments from all icelandic parties could place on the krona in the months to come if nothing else changes, and our need for foreign exchange reserves will be further clarified as well. one