known, the us federal reserve bank reduced its interest rates in several stages, for a total reduction of 2. 25 %, over the course of the fall and winter. the bank of england has lowered its base lending rate twice this winter, for a total reduction of 0. 5 %. other central banks in our neighbouring countries have not lowered their rates. the european central bank has kept its interest rates unchanged for several months, and the central banks in norway and sweden raised their rates earlier this year. the reserve bank of australia also raised its rates recently. australia belongs to the group generally referred to as high - yield countries. at this point, it is impossible to say what these banks ’ next interest rate decisions will be. on thursday, april 10, the central bank will publish its next issue of monetary bulletin, which will contain its newest macroeconomic and inflation forecasts. at that time, the board of governors will announce its next policy rate decision. the global financial markets have been in a state of flux in recent months, primarily because of the crisis in the us sub - prime mortgage market. securitised assets based on sub - prime lending proved much more risky than previously believed, even by credit ratings agencies, which had given various collateralised debt obligations their highest ratings. but when they were put to the test, it emerged that they were far from reliable, and banks all over the world that had invested heavily in them lost staggering sums of money, amounts that are practically unheard of. in some instances, the losses were such that they compromised the banks ’ equity position and forced them to seek out new share capital. a large number of banks have had to write off billions of us dollars, and some have even been forced to write off tens of billions. and in all likelihood, the effects will continue to emerge. last year ’ s changes in the global financial markets were swift. for a long time, liquidity had been ample, interest rates low, and risk appetite high. that situation changed – virtually overnight – to one characterised by a lack of liquidity and a re - evaluation of the pricing of risk, and this resulted in substantially increased interest rate premia. banks became especially careful in their transactions with one another, and a considerable tightening of interbank markets ensued the world over. central banks on both sides of the atlantic reacted by granting special liquidity facilities with virtually unprecedented amounts and maturities. as the end of the year approached, conditions in the interbank markets improved

only 12 % of gdp. they grew somewhat with the first drawdown of the loan in connection with the economic programme with the imf, to about 24 % of gdp by mid - 2009. nearly all of iceland ’ s reserves were financed with foreign credit. so the situation was difficult, but in addition, there was substantial uncertainty about what would happen next. would we succeed in stopping the depreciation of the krona, which was still ongoing, partly because the capital controls weren ’ t working as intended? the second review of the economic programme with the imf, and the disbursement of the second tranche of the loan facility, was delayed because of the icesave dispute. the capital controls had sequestered an overhang of offshore kronur amounting to some 40 % of gdp, and it was not yet known how big a balance of payments problem lurked in the failed banks ’ estates, as the split between the new and old banks had not been completed. the new banks had not yet been capitalised sufficiently, and non - performing loans represented a major problem. as a result, it was highly uncertain how the new banks would fare. would efforts to put public sector finances on a sustainable footing be successful? in short, all three of the key objectives of the imf programme were still up in the air : exchange rate stability, fiscal sustainability, and financial system reconstruction. we know now that the turnaround was just around the corner. the economic contraction, of course, was a consequence of the financial crisis, but it also stemmed from the inevitable adjustment of unsustainable economic imbalances and from the contraction of bloated sectors such as construction and financial services. the adjustment showed most clearly in the current account balance, which flipped from a double - digit deficit before the crisis to a sizeable surplus as early as 2009. such a swift and sizeable turnaround is a rarity in international context and has drawn considerable attention. the drop in the real exchange rate by 45 % from the pre - crisis peak played a role in this adjustment, although it overshot, initially causing severe side effects because of the large stock of foreign - denominated debt owed by resident borrowers without any natural hedging in the form of foreign income or assets. as a result, strong emphasis was placed on halting the collapse of the krona. this was achieved in h2 / 2009. closing loopholes for capital outflows and adopting