part of the central bank than were applied then. standard & poor ’ s recently upgraded its credit rating for the republic of iceland, which now has very good ratings from the three main sovereign ratings agencies, i. e. standard & poor ’ s, moody ’ s and fitch. all the agencies keep a very close watch on economic developments in iceland. because standard & poor ’ s has recently upgraded iceland ’ s sovereign rating, it is interesting to examine the main points in its rationale, both the positive factors that support the rating and others that are identified as potentially weakening it. the agency says that its upgrade reflects significant and sustained improvements in the resilience and structure of the icelandic banking sector. improved regulation and supervision leave the financial sector much more resilient. the recent entry of the commercial banks into the icelandic mortgage market provides the private financial sector with additional domestic stability and profitability. public finances continue to be healthy and iceland boasts stable and flexible political institutions. however, the agency also points to very high and rising levels of net external debt throughout the economy, high current account deficits and relatively poor external liquidity. adherence to the government ’ s medium - term fiscal framework is central to maintaining the ratings and further unforeseen adjustment would need to be accommodated through fiscal policy, not monetary policy. any significant increase in net external leverage or a recurrence of entrenched macroeconomic imbalances on the back of the large investment projects could weaken iceland ’ s creditworthiness. these were the main points highlighted by standard & poor ’ s and there is every reason to take them seriously. of course it is crucial for the republic to enjoy a good credit rating. it is important for the treasury ’ s access to markets and investors, and for its credit terms. iceland ’ s sovereign rating also represents the ceiling for ratings of icelandic banks and other rated institutions. favourable ratings are vital for the banks ’ expansion abroad and for their growing need for easy access to foreign credit. thus the treasury and the banks share an interest in iceland being able to maintain its good credit rating. ladies and gentlemen as i mentioned earlier, the central bank raised its policy interest rate by 0. 25 percentage points last week. the bank has thereby raised its policy rate by 3. 7 percentage points since its first hike in may last year. these measures reflect the central bank ’ s view that, given the current economic situation and the scenario two to three years ahead, it is much more effective to ensure a

of actual defaults and the timing of their occurrence. the paper by yang and zhou goes beyond the usual focus on the existence of contagion and will present an analysis of the pattern of propagation across financial institutions. for an illustration showing how big the challenge to identify systemic risk is, one does not need to go back very far in history. in 2003, a young analyst in new york stated the following : “ you just have to watch for the level at which a nearly unlimited or unprecedented credit growth can no longer drive housing markets higher. i am extremely bearish and feel the consequence could be a 50 % drop in residential real estate in the us. a large portion of the current [ housing ] demand at current prices would disappear if only people were convinced that prices were not rising. the collateral damage is likely to be of orders of magnitude worse than anyone now considers ”. 4 it took another 4 years that these risks and, particularly, the systemic impact and costs materialized. analyzing systemic risk means, therefore, mainly going beyond mainstream thinking and challenging widespread beliefs. we are in need of the type of analyst i just quoted. i am very much looking forward to hearing this conference ’ s analysis on the containment of such systemic risk, the future challenges and the possible policy options we have going forward. quote from m. lewis, the big short, 2010.