arnor sighvatsson : the logic behind the capital account liberalisation strategy speech by mr arnor sighvatsson, deputy governor of the central bank of iceland, at a meeting of the iceland chamber of commerce, reykjavik, 15 december 2011. * * * ladies and gentlemen on 25 march 2011, the central bank published a capital account liberalisation strategy allowing for removal of the capital controls in two phases. phase i would focus on channelling unstable krona assets, particularly those held by non - residents, into the hands of investors willing to take a long - term exposure on the krona. in phase ii, other controls would be lifted. the strategy is relatively terse as regards phase ii, as a number of things could change before it can be launched. as a consequence, phase ii will be drafted in greater detail at a later stage. therefore, in my presentation today, i will focus on phase i and attempt to explain why the individual steps within it are being taken in the order specified in the strategy. the main problem the strategy is attempting to solve is lack of confidence : in the domestic economy, the currency, and the government ’ s capacity to service its debt. confidence between individuals and between firms, domestic and foreign alike, is a precious commodity whose true value is only realised when lost. the reason confidence plays such a vital role in the mechanics of the economy is that each party ’ s confidence depends on the confidence of all the others. recent runs on short - term bank liabilities and the fiscal crisis in the euro area are a clear example of this. no one wants to be the last one to withdraw his deposits from a tottering bank, sell bonds issued by a country heading for insolvency, or rid himself of the currency of a country facing an imminent balance of payments crisis and potentially unsustainable debt burden, even though it may only be unsustainable provided that other investors think it is. the capital controls stopped a run on iceland ’ s currency. in a sense, they also undermined confidence for the long term – that is, investors ’ confidence that iceland ’ s economy and public sector finances could achieve balance and sustainability in the absence of controls, knowing that the fragile balance created by the controls is based on coercing many investors to hold krona assets. ultimately, confidence can be established only under conditions of free trade, not through coerced transactions. fortunately, however, investors ’ view on the icelandic economy is diverse. some

longer - term refinancing operations ( ltros ) and decides the main refinancing operations to be carried out through a fixed - rate tender procedure with full allotment. ecb cuts the base interest rate from 2. 50 % to 1. 00 %, and introduces the first covered bond purchase programme ( cbpp1 ). ecb activates the securities markets programme ( smp ). the ecb launches the second covered bond purchase programme ( cbpp2 ) and introduces the 3 - year ltros. the ecb announces the outright monetary transactions ( omts ). the ecb cuts the base interest rate to 0. 25 % and introduces forward guidance. the ecb cuts the base interest rate to 0. 05 % and the deposit facility rate to - 0. 20 %, bringing it for the first time in negative territory and introduces the targeted longerterm refinancing operations ( tltro ) with a 4 - year maturity. ecb introduces the expanded asset purchase programme ( app ) and cuts the deposit facility rate to - 0. 30 %. ecb accelerates the expanded asset purchase programme ( app ) and cuts the main refinancing operations ( mro ) rate to 0. 00 % and the deposit facility rate to - 0. 40 %. indeed, the 10 largest central banks now own assets totaling $ 21. 4 trillion, accounting for 29 % of the world economy, up by 10 % from end - 2015, double what it was in midseptember 2008 and almost half the value of all debt in bloomberg ’ s global bond index ( as shown in chart 1 )! chart 1. the combined assets of the 10 largest central banks finally, almost 75 % of the world ’ s central bank assets are controlled by policy - makers in four regions : china, the us, japan and the eurozone. the following six – that is, the central banks of england, brazil, switzerland, saudi arabia, india and russia – each account for an average of 2. 5 %. the remaining 107 central banks tracked by bloomberg, mostly with imf data, hold less than 13 % ( see chart 2 ). chart 2. central banks ’ combined assets chart 3. stock of assets purchased by the four major central banks as a percentage of national gdp source : bank of greece, european central bank, fed, bank of england and bank of japan. note : the ecb ’ s purchased assets in the context of the