such a development. that doesn ’ t change the fact that we would all have to make a concerted effort to botch things in order to prevent the exchange rate from being considerably higher in a few years ’ time than it is today. but then we will have to remember to buy back the foreign exchange that we have used to support the krona in 2008 and 2009. if we do that, then we might profit on the whole arrangement. i expect this spurs questions about whether we need all of the loans that we have negotiated as a part of the imf programme. in my opinion, this is an eminently justifiable question. first of all, we need the loans in order to ensure that we have sufficient foreign exchange at all times to enable us to pay amortisation and interest on the foreign debt of the treasury and treasury - guaranteed entities. as far as the treasury is concerned, there will be little activity until late in 2011, when a loan of one billion euros, taken in 2006 to reinforce the foreign exchange reserves, will mature. but we can also use the loans to buy the bonds from this series and others offered in the secondary market at low prices, thereby easing the debt service burden and profiting on the whole arrangement. furthermore, we will need reserves in order to engage in moderate foreign exchange market intervention, with the aim of supporting the krona and reducing volatility. and last – but certainly not least – we need reserves in order to create confidence in the krona and fend off those who would attack it. but such an arsenal, which is only to be used in an emergency, is extremely expensive because it is impossible to invest the reserves at rates comparable to those on the loans themselves without taking an unacceptable amount of risk. thus it is important to avoid borrowing more than necessary and to emerge as soon as possible from our current state of imbalance. before i turn to the economic outlook and the monetary policy committee ’ s most recent interest rate decision, i consider it necessary to say a few words about the nature of the adjustment the icelandic economy is currently undergoing. first of all, it should be borne in mind that the year 2009 would have been extremely difficult in any case, no matter whether the banks had collapsed or not. this is because of the huge macroeconomic imbalances that developed in the icelandic economy in 2005 - 2007 and had to subside in one way or another. second, the collapse of the banking system called unavoidably

##rona and a slightly smaller output slack than previously projected. • inflation will subside quickly in 2010, however, and underlying inflation will be at or near target in the latter half of the year. as regards the current economic situation, the outlook i have described here, and indicators that private sector balance sheets are somewhat less exposed to exchange rate risk than previously thought, the monetary policy committee decided to make changes in central bank interest rates that entail an unchanged or slightly more relaxed monetary policy stance. the main change, however, involves adapting the central bank interest corridor to the effective level of monetary restraint, which is currently determined primarily by interest on the bank ’ s current accounts and certificates of deposit. if the krona remains stable or appreciates, and if inflation falls as forecast, then the preconditions for further monetary easing should soon be in place. available forecasts assume that the icelandic economy will recover in the next few years. we also hope we will be quick to escape the fetters of the capital controls and the predicament faced by monetary policy as a result of the debt crisis and the large proportion of foreigndenominated debt. it will then be time to determine a new monetary policy framework. joining the european monetary union could be an option in due time, but it is not a certainty, and in any event, it will take some time to materialise. the most obvious choice is therefore to adopt some sort of inflation target and floating exchange rate. that is a topic for another speech, but for the moment, suffice it to say that the experience of the past several years, both in iceland and elsewhere, indicates that such an inflation - targeting regime would have to be somewhat different than the pre - crisis regime. it must be much better supported by fiscal policy, macroprudential financial market regulation, and effective financial supervision. it would have to be an “ inflation target - plus ” framework, which would specifically include accumulating foreign exchange reserves during upswings in the exchange rate cycle and using them in times of need. thank you.