also, in some sense, preserved the obstacles to swift and orderly liberalisation of capital controls. if parliament had not passed the emergency legislation in october 2008, thereby ensuring that there was a functioning banking system and that domestic deposits were secure, if capital controls had not been introduced in november 2008, if we had not been so successful in repairing domestic balance sheets, if the economic recovery had been weaker and the rate of return on domestic assets had been lower, then the domestic assets of the old banks would have been worth much less, as would the offshore kronur. in this scenario, these positions might have exited iceland long since, at just a small fraction of the value they had just before the resolution of the old banks. instead, the domestic assets of the old banks amounted to 25 % of gdp and the stock of offshore kronur was estimated at around 15 % of gdp. it was clear that free exportation of these positions without mitigating action would have resulted in a new currency crisis, with potentially serious effects on financial stability. that was both economically and politically unacceptable. as a matter of fact, the population had been promised solutions to these problems entailing no negative effect on the exchange rate. the icelandic authorities have publicised three versions of their capital account liberalisation strategy : the first in 2009, the second in 2011, and the current one in june 2015. it was under the second strategy that the stock of offshore kronur was reduced through a series of auctions. that strategy, however, did not include a solution to the problem of the old banks. the split between the old and new banks was only finalised towards the end of 2010, and in any case, the old banks were largely exempted from the controls until march 2012. the current strategy is based on a guiding principle and a set of criteria that any proposed solutions would have to fulfil. if i explain these to you now, you will better understand what we have done to date and what is forthcoming. an overall guiding principle in the design of the liberalisation strategy was that it should entail comprehensive, cautious, and clearly communicated solutions, allowing the country to lift capital controls without undue risks to macroeconomic and financial stability. the strategy is comprehensive in the sense of mitigating, in a sufficient manner, the risk that excessive capital outflows would overburden iceland ’ s small foreign exchange market and inflict systemic negative externalities on the general public. in particular, it

price indexation. the negative effect that further depreciation would have had on consumption and investment would therefore have been stronger than the stimulative effect on the traded goods sector. the latter effect comes with a lag in any case, and the real depreciation of about one - third, which had already taken place, was sufficient for that. second, a large fiscal deficit had opened up and had to be financed domestically, as the sovereign was cut off from foreign markets. the capital controls facilitated this. third, the capital controls gave monetary policy more scope to focus on the domestic economy, as interest rates would otherwise have had to be higher in order to defend the currency. fourth, the capital controls provided the shelter needed to restructure domestic balance sheets, rebuild the financial sector, and develop a better framework for economic and prudential policies that would be suitable for a postcapital controls environment. these stabilisation gains of the capital controls were greatest to begin with but have faded with time as balance sheets have been repaired and iceland has recovered. the economic costs of the controls work in the other direction : they increase over time as lost business opportunities accumulate, as support to domestic asset markets begins to feed bubbles, and as risk diversification in domestic balance sheets decreases. in iceland ’ s case, this was partly mitigated through the liberalisation of capital inflows in october 2009 and legislative provisions that authorise the central bank to grant exemptions from the capital controls, bis central bankers ’ speeches provided that the balance of payments effects are not negative. but that does not change the big picture. furthermore, the potential distortion stemming from the combination of free capital inflows and restricted capital outflows has materialised recently, as carry trade and other forms of capital inflows have increased following the announcement and subsequent execution of the resolution of the old banks in a manner that fully mitigated the negative balance of payments effect. this has created appreciation pressures that are not counteracted by outflows, as would have occurred under normal conditions. finally, in the long run, comprehensive capital controls are inconsistent with iceland ’ s membership of the eea and thus the eu internal market. you might then ask : why have we not just lifted the capital controls? this is where the twist in the tale comes in. the problem is that our own success in preserving icelandic asset prices and fostering the recovery of the economy has created the conditions for a stronger currency but has