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

by central bank and authorised it to borrow abroad in the name of the treasury in order to strengthen its foreign reserve substantially, while the government was also mandated by parliament to strengthen the bank ’ s capital position. the board of governors would like to thank the government for such a good, firm response. the foreign loan that the central bank was authorised to take was its largest on behalf of the treasury so far. it can only be said that this was a highly successful measure – in fact, a respected international financial journal ranked it one of the ten most successful international bond issues worldwide last year. the borrowing terms were very favourable and of course reflected the confidence enjoyed by the republic of iceland in the market. the central bank ’ s greatly enhanced capital position and stronger foreign reserves do not signal any shift in its policy, but represent a natural response to changes in the environment in which the bank operates. at last year ’ s annual meeting we all had serious concerns about the peculiar discussion and sometimes unfounded speculation aired then about the icelandic banks, their position and strength. there is no doubt that this debate and the ensuing events made conditions tighter for the banks for a while. the banks responded firmly to the uncomfortable position that had arisen. they made great efforts to explain the structure and organisation of the icelandic banks. this was no half - hearted measure, but a steadfast and confident approach which produced results. the banks adjusted certain aspects of their operations and operating environment in response to relevant criticisms, and dismissed what was less relevant with explanations, reports and candid communication, at large meetings, small meetings and man - to - man, depending upon which was most productive. they needed temporarily to look beyond their traditional markets for funding, and unquestionably these conditions put their resources and management under strain. it can definitely be said that those involved passed this difficult test. the funding problem that loomed around this time a year ago is a thing of the past, terms in the secondary market have been normalised and market confidence has been restored. this is to be welcomed. what remains, however, is of course that people are now more aware of the widespread risks that the future may hold in store. global market conditions can change suddenly. credit access, which in recent times has been exceptionally favourable for icelandic and other banks, may change suddenly if unexpected conditions arise. it is important to be prepared for such a contingency. at the height of this furore, i would venture to say that the central bank made