and ultimately support recovery. in broad terms, these goals have been realised. without the controls, much stricter monetary policy would have been required in the early stages of the crisis. the treasury would have had much less scope to mitigate the contraction in 2009, as domestic financing of the deficit would have been much more expensive. in this context, it is worth noting that, on average, real interest rates on new domestic treasury borrowings were negative by almost half a percentage point in 2009 – 2012. but these stabilisation gains of the capital controls will diminish over time. the capital controls also have efficiency costs associated with them – costs that were probably modest to start with but increase with time. there is little or no research on how high these costs are at present, and assertions to that effect are not well founded. it is still more difficult to make a quantitative assessment of the risk accompanying liberalisation of the controls, which is presumably greater the faster the controls are lifted and as the economy is less prepared for it. from a theoretical standpoint, we should lift the controls the moment the present value of future efficiency costs exceeds the present value of future stabilisation gains, including the risk accompanying speedy liberalisation. that precise moment can never be identified with any certainty, however, although most signs indicate that it has not come yet, for if it had arrived, rapid liberalisation would be underway. at this point, it is likely that the benefits of lifting the controls more gradually are still greater than the cost of retaining them for a little longer. the pivotal issue here is what tools they give us in order to prevent the settlement of the failed banks from jeopardising financial stability. but none of this changes the fact that we must lift the controls as soon as it is safe to do so, both because of the economic cost of retaining them and because of iceland ’ s international obligations. in my speech a year ago, i said that this was one of the most complex tasks facing the icelandic authorities at the time. that has not changed. a prerequisite for success is that we base our efforts on the best possible analysis of the problem and the potential solutions to it. until now, the controls have been viewed as providing shelter during the bis central bankers ’ speeches resolution of the balance of payments problems caused by the collapse of the financial system. if all non - residents ’ potentially volatile claims on residents were paid in a short period of time, iceland would pay down foreign debt

failed banks and the effects of pharmaceuticals company actavis. iceland could therefore reduce its net external debt by that amount. the problem is, however, that the calculations shown in the bank ’ s report assume this surplus could contract in coming years and may even turn into a deficit at a time of rising foreign debt service for borrowers without access to foreign refinancing. if these parties do not gain access to the market on acceptable terms in the near future, or if other capital inflows are not forthcoming, significant downward pressure on the icelandic krona will be inevitable. weighing heavily in this context is the debt owed by new landsbankinn to the old bank. negotiations concerning the possible lengthening of the maturity of this debt are underway. it is possible to argue that this outlook is based on extremely pessimistic assumptions. market access has already opened up, as arion bank ’ s recent foreign borrowings show. the calculations in the bank ’ s report assume that foreign interest rates will return to pre - crisis levels in a few years, but there are few signs of this at present. it is also assumed that the import ratio will return to pre - crisis levels. the central bank will examine additional scenarios for possible developments in the balance of payments in coming years, and developments in market access in coming months will have a significant effect on the outlook. in spite of this proviso and the necessity of not presenting unrealistically pessimistic scenarios that could undermine confidence needlessly, this scenario does not go so far, and we must determine what we can do to prevent such an outcome. economic policy and the structural reforms must ensure that iceland ’ s competitive position does not deteriorate more than can be expected following a normal rise in the real exchange rate from historically low levels, given that we will have a current account surplus while we are working our way through the bulk of the debt. it is most important that public sector finances be well in surplus during this period and that attempts be made to ensure a higher level of national saving than prevailed in iceland before the crisis. furthermore, it is clear that the scope to use the current account surplus to release non - residents ’ isk assets will be extremely limited in coming years. how likely is it, then, that we can lift the capital controls in the next few years? obviously, it would be much easier if new capital inflows were forthcoming, either through new foreign borrowing or through foreign direct investment.