central bank made 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

icelandic companies have been undervalued by the markets, for example relative to comparable businesses in other countries, and another that bold and determined investment ventures have driven up their value. but risk and gain often go hand in hand. sometimes the stakes may be raised too high. it has long been customary to pay a premium for attractive investment options. such goodwill used to be depreciated in companies ’ accounts over a long period and rarely affected their operations. the situation has changed whereby companies now need to make impairment tests of the goodwill they enter on the asset side of their balance sheets. if their original ventures fall flat, the goodwill must be depreciated accordingly. thus there is a risk, if conditions deteriorate, that this rule could amplify a company ’ s negative results at the worst possible time. goodwill totalling more than 500 b. kr. was entered in the financial statements for 2006 of companies listed on iceland stock exchange, and at certain companies, goodwill and other intangibles account for more than half of the total assets on their books. this is a cause for some deliberation. although the central bank ’ s main function on occasions such as this is to draw particular attention to causes for concern, it should of course take note, like everyone else, of the factors conducive to strengthening the long - term economic outlook. iceland ’ s economy is advanced, transparent and vibrant. its strong fiscal position is exemplary, and the population is relatively young, well educated and quick to adapt to technological and scientific innovations of all kinds. a strong pension system has been built up and – unlike other countries that have great fears about the future of their pension systems and their sustainability – it is clear that iceland ’ s pension system is becoming increasingly stronger. admittedly it is still not mature enough to have begun to pay out a representative proportion of its owners ’ lifetime earnings, but this proportion is growing every year and all the pointers indicate that, for the foreseeable future, it will be highly sustainable. thus the pension system is going from strength to strength in iceland, at the same time as significant weaknesses are coming to the fore in many comparable economies. real incomes in iceland rank with the highest in the world, and unemployment with the lowest. large - scale investments have recently been made which will generate handsome export revenues. traditional sectors currently enjoy secure markets and high product prices. undeniably this picture looks very bright and many more positive signs could