the sovereign to default on its obligations, which would have left iceland shut out of international capital markets for years. a key aspect of crisis management was therefore to ring - fence the sovereign from the failing banks and minimise the socialisation of private sector losses. and iceland was well on its way into its deepest post - war recession, where gdp contracted by 12. 5 % from its peak in the fourth quarter of 2007 to its trough nine quarters later, in the first quarter of 2010. it fell from an unsustainable peak, of course, but the drop was spectacular nonetheless. bis central bankers ’ speeches where are we now, almost five years later? first, there is hardly any talk of a potential sovereign default any more : the public sector has a primary surplus, the overall deficit is estimated to have been around 2 % of gdp last year, government debt as a share of gdp is on a downward trajectory, and iceland has investment - grade ratings from all three major rating agencies. second, we are far advanced in rebuilding a domestically oriented financial sector. the new domestic banks, which were built on the ashes of the three failing cross - border banks, are profitable, well capitalised, liquid, and with nonperforming loan ratios that, although still high due the crisis, are falling to normal levels as private sector debt restructuring progresses and the economy recovers. third, the economy has indeed recovered, as can been seen on figure 1a. the economy has been growing since the second quarter of 2010, and unemployment has fallen from a peak of over 9 % to around 5½ %. and as figure 1b shows, this year iceland is projected to be among the world ’ s five fastest - growing advanced economies, with growth estimated at 2. 1 %, although that is due in part to the recent slowdown in many other advanced countries. and the prediction is that iceland will grow even faster during the next two years, or in the range of 3½ – 4 % per annum, causing the slack in the economy to disappear and the unemployment rate to fall to around 4 %. bis central bankers ’ speeches so how did we get here? in answering this question, we need to remember that subsequent developments were not only a function of the negative shocks hitting the economy in 2008 but also a function of the policy responses. in addition to crisis management vis - a - vis the failing banks, which i have already mentioned, the economic programme that the icelandic authorities developed in co - operation with the

capital movements. that is also underway. the third element is to reduce the overhang of liquid offshore kronur to a safer level, either through release at a discount or by tying the offshore kronur up in longer maturities and real investments. that is underway as well, although some are of the view that the process is too slow. the fourth element is to open market access and, through other means, generate longer - term inflows to replace the capital that wants to leave. history shows that those who jump early on such a bandwagon have a lot to gain. let me conclude by saying that iceland has made great strides since the autumn of 2008. the next major task is to re - integrate iceland financially into the global economy, but hopefully in a safer way this time. thank you very much. bis central bankers ’ speeches