a strong contribution with its financial stability report, which was deemed to be professional, candid and in line with international best practice. the bank ’ s next financial stability report will be published towards the end of april. although these were not enviable times for financial companies, they definitely learned a lesson from this ordeal and are both more cautious and more aware of external influences than before. rapid and sweeping changes in the financial sector put a great strain on regulatory agencies, which may face an uphill struggle to keep up with the swift pace of developments. the same may undoubtedly be said about the central bank. after all, useful and supportive as these institutions may be, they neither can nor should play a leading role. that role can only be performed by the financial companies themselves. because they rely so heavily on open access to credit markets, it is crucial for them to enjoy the confidence of their creditors. in this respect like many others, credibility is a fragile thing and a very high price can be paid for losing it. turbulence in global markets is sure to continue. naturally people try to read the signs and foresee the most important parameters, in order to adapt to them in good time or respond sensibly. important as it is to keep a close watch on developments and changes in global markets, what matters most of all is to be strong and well - positioned enough to withstand the most unexpected shocks. global liquidity has been exceptionally abundant in recent years, and has been widely tapped on good terms. the benefits of resourcefulness and bold, quick action can be realised to the full in such circumstances. it is impossible to rule out that such a climate will persist for a long while, but this is by no means certain. and when a change does take place, it may be caused by unexpected circumstances and strike quickly. it is then that caution and prudence prove most effective. interest rates have been on the increase recently in most parts of the world and capital is not as cheap as before, although it can still be procured at very low rates. conditions in capital markets in general are therefore more likely to tighten in the coming years. influential as economic developments on both sides of the atlantic may be for the icelandic economy, the way we handle our own affairs is still important. the crucial consideration is to achieve a rapid reduction in macroeconomic imbalances and restore stability. to do so, domestic demand must be reduced. part of this process will occur automatically with the completion of ongoing investments in

iceland ’ s economic history. even if gdp contracts on the scale forecast by the central bank in 2009 and 2010, average gdp growth in the period 2005 to 2010 will still be well above 2 %. given the characteristic fluctuations in the icelandic economy, one must take a longer view of developments than just one year to get a picture of long - term trends. it is also important to keep in mind that the contraction of the economy is unavoidable if sustainable balance is to be restored following the extended period of overheating. once that has been achieved, the economy will be very well set for a recovery of growth to a long - term sustainable trend. iceland is in the enviable position of being endowed with rich renewable energy resources in the form of hydro and geothermal power in addition to renewable resources of the sea. with rising energy prices and concerns for the environment, iceland ’ s energy reserves become all the more valuable. in addition, iceland has highly developed service sectors, including financial services and tourism, that will contribute to the recovery of activity following the adjustment of the economy. i should add here that in addition to favourable demographics, iceland has a largely fully funded pension system with total assets equivalent to over 130 % of gdp. thus, there is no fiscal overhang related to a slowly aging population. daniel svavarsson : international investment position : market valuation and the effects of external changes. central bank of iceland : monetary bulletin 2008 / 1. focusing again on developments this year, the attention of the outside observer is easily arrested by the depreciation of the krona. i mentioned earlier that it was overvalued for a rather extended period to the extent that the central bank warned that it would at some stage have to depreciate. the depreciation came earlier and faster than we would have hoped, partly and perhaps most importantly because of the radical changes in global financial markets after the middle of last year and the associated reassessment of risk. these changes meant that the access of icelandic banks to foreign financing was seriously curtailed. additionally, questions were raised about the viability of the icelandic economy in light of the large imbalances and all of this led to an erosion of confidence. subsequently, the exchange rate depreciated significantly. by the end of march it had fallen to a historically low level in real terms, a level that was clearly below its long - term equilibrium value. the central bank responded to the developments in march by raising