birgir isleifur gunnarsson : iceland in a global setting keynote speech by mr birgir isleifur gunnarsson, chairman of the board of governors of the central bank of iceland, at the euromoney conference on the nordic financial markets and investment opportunities, stockholm, 13 september 2002. * * * mr. chairman, ladies and gentlemen. it is a pleasure to participate in this ambitious conference on the nordic financial markets and investment opportunities. i will in my remarks today mainly focus on aspects relating to iceland. size separates iceland from the other nordic countries, denmark, finland, norway and sweden. other factors separate the nordic countries as well. finland is a member of the european union and the economic and monetary union, emu, as well. denmark and sweden are members of the european union but are outside the emu. norway and iceland are outside the european union but maintain very close ties to it, particularly through the european economic area agreement. that agreement makes norway and iceland a part of the single market of the european union, which entails among other things that they are obliged to maintain financial market legislation, which fully conforms to that of the european union. the nordic countries have different monetary regimes. finland is a member of the emu, denmark is linked to the emu through an erm ii agreement entailing that the danish krona is very closely tied to the euro. sweden, norway and iceland have chosen an inflation - targeting regime as their monetary framework ( iceland in march 2001 ). thus, price stability is the main objective of monetary policy in all of these countries and has in fact become the recognized single target for monetary policy in numerous countries. the reason for this emphasis on price stability is that it creates the best conditions for balanced growth and increased welfare. the icelandic financial market has developed very rapidly over the last ten to fifteen years. it is a small market by definition, but has nevertheless the same institutional set - up as larger industrial countries. aside from the central bank, these include commercial banks, savings banks, securities companies, various investment funds, insurance companies, large and important pension funds and last but not least a stock exchange - linked with the other nordic exchanges - where the shares of 60 to 70 icelandic companies are listed and traded on regular basis. supervision of the activities of all of these institutions is in the hands of a unified financial supervisory authority that has broadly the same legal powers and follows the same methods and standards as supervisory agencies in other european countries.

banks, a development which continued by and large into the current year. consequently, the capital position of the banks has improved and all the major banking institutions have relatively strong capital adequacy ratios at present. loan losses have increased, as was to be expected in the wake of the credit expansion, but nowhere on the scale experienced in some of the other nordic countries a decade ago and very much less than they did during the downturn in the icelandic economy around and after 1990. the conclusion to be drawn is, therefore, that the icelandic banking system weathered the relatively turbulent post - liberalization boom period of 2000 and 2001 pretty well and is well poised to meet new challenges, including continued rationalisation and intensified competition from foreign banking institutions. in the most recent decades, the icelandic economy has also seen structural shifts. the importance of fisheries as a generator of foreign exchange revenue has diminished in relative terms - to less than a half of the total - while the importance of other sectors has risen, such as manufacturing industry, information technology and tourism. in these developments, iceland is among other things drawing benefits from globalisation to strengthen the foundations of the economy. foreign direct investment regulations are liberal with the exception that such investment is not permitted in the fishing sector. foreign direct investment is most noticeable in power intensive industry, such as the production of aluminium, which is based on iceland ’ s abundance of untapped renewable energy resources. recent changes in corporate taxation in iceland, lowering corporate taxes to among the lowest to be found, serve to attract foreign business to iceland and encourage icelandic companies with international operations to favour iceland as the base of their operations. direct investment by icelandic companies abroad has risen rapidly in recent years and in a variety of areas, such as fisheries and fish processing, pharmaceuticals, retail commerce and financial services. these developments also benefit the icelandic economy in the long run as they integrate iceland further into the global economy, allow iceland to draw more easily on the experience of others and bring in dividends. reflective of this development is the fact that icelandic banks have begun to grant credit to borrowers in other countries on a measurable scale, particularly in areas where they have a competitive advantage in analysing the soundness of the prospective borrowers. the title of my presentation is iceland in a global setting. what i have briefly described is a country that has followed the path of many countries, including the nordic countries, in liberalising its economy, both internally and externally. this has exposed the economy to market forces