, the risk that the party selling the credit protection cannot pay. counterparty risks exist in most financial agreements, but as the credit derivatives market is so young and growth is so rapid, there is particular reason to be aware of them. there is insufficient statistical data available and it is difficult to assess where the risks will end up. at the same time, risk management within banks has developed significantly over the past ten years or so. banks that trade in credit derivatives normally have strict routines for checking and evaluating their counterparties. moreover, the sellers of credit derivatives are often insurance companies and pension funds, and have large equity capital to deal with potential credit losses. i would also like to point out that the large trading volumes i mentioned earlier should not be translated directly into risks. it is, of course, very unlikely that a seller of credit protection would need to compensate the entire credit risk in his portfolio. for this to happen, all of the companies concerned would have to go bankrupt at the same time, and with zero recovery. to return to the example of house insurances, this would mean that all houses insured by a particular insurance company would simultaneously burn down to the ground. this is a worse scenario than any town fire in our history. but one should not forget that various shocks in the economy can lead to substantial total credit losses. bank crises around the world have proved this. 3. liquidity risks thirdly, there is reason to be aware of possible liquidity risks. problems may arise if the market actors rely on the market always being liquid and assume this when making their deals. what would happen, for instance, if several credit events were to occur simultaneously? perhaps there would suddenly be only sellers and no buyers in the market. then prices will plummet. this was the case during the russian debt crisis in 1998, for instance, when the ltcm hedge fund suffered problems. a crisis of this nature risks spreading rapidly to other financial markets and possibly threatening the lending banks. such situations do not last particularly long, as buyers always appear when prices fall. this was also the case after the ltcm crisis. remember also that the credit derivatives market and the market for the underlying bonds are tightly interwoven. if the premiums on credit derivatives increase substantially, this will mean that at the same time the return on the underlying bonds increases. unless something important has happened that affects the credit rating of the company that has issued the bonds, it will sooner or later become profitable to buy them

terrorism on 11 september 2001. although a weaker exchange rate contributes to boosting exports, the effects are limited if international demand is low. at the same time, a weak krona provides higher imported inflation. we are expecting the exchange rate to strengthen in the slightly longer term, but to remain weak until the most acute stage of the crisis is over. to summarise in brief, we are assuming that the financial crisis will in various ways make the wheels of the economy turn much more slowly. growth is expected to slow down both in sweden and abroad. our forecast is that the increase in gdp in sweden, europe and the united states will remain around zero next year, but recover in 2010 and 2011. the labour market, resource utilisation and inflation in that the financial crisis aggravates the ongoing economic downturn, we are assuming that the labour market will show weaker development and that inflation will be lower than we forecast at the beginning of september. resource utilisation in the economy is still at a slightly higher level than normal. however, we are assuming that it will fall rapidly and be somewhat lower than normal over the coming years. inflation is still high at the beginning of the forecast period. but during next year we are expecting it to fall rapidly. opinion polls also indicate that inflation is expected to be lower in the future. our assessment is that inflation will be below two per cent in 2009. it will then rise slightly and be on target in 2011. considerable uncertainty in the assessment i would like to add that the uncertainty in our assessment is unusually large on this occasion. as always, it is therefore important to remember that the path we present for the repo rate is a forecast and not a promise. it may be necessary to cut the rate more, or less, than we are assuming now. if the financial crisis worsens, or if the effects on production and employment are more powerful than we believe, a lower interest rate might be necessary. however, if the krona were to remain weak or if inflation were to become entrenched at a high level, a higher interest rate might be necessary. the interest rate decisions we will make in the future will depend quite simply on how new information affects the outlook for inflation and economic activity in sweden. we are following developments closely and are prepared to take action when necessary. a concluding reflection around 15 years ago i was appointed head of the swedish bank support authority. sweden was in the midst of a deep economic crisis ; a crisis