Fortunately, though, once the next IMF review is complete, there will be no doubt about it. The foreign exchange reserves now total 1.7 billion euros, apart from shortterm obligations. In the next few months, they will expand by 453 million euros due to transactions related to Avens, 255 million euros from the sale of FIH bank in Denmark, and 620 million euros following the third IMF review. The reserves will then exceed 3 billion euros. In comparison, the next two years’ interest and instalments on two Treasury bond series total 1.5 billion euros, 400 million of which have already been bought back at a discount. The following two charts show clearly how much foreign liquidity will improve. They show that the foreign exchange reserves will grow as large as 4 billion euros if Iceland draws the full amount of the loan facilities available through the IMF programme, and that they will cover the Treasury’s instalments and interest payments through 2015. Of course, access to foreign credit markets will open up long before that time, and a part of the debt will be refinanced in the market. 4  BIS Review 130/2010  I know that all of you who are assembled here today are very interested in how the exchange rate will develop once the Icelandic economy rights itself, hopefully within a few quarters. The chart below shows the real exchange rate of the króna, which is currently about 20% below its historical average but dropped as far as 33% below that average during the crisis.
1 At the conference, Professors Carmen and Vincent Reinhart presented the results of a broad-based study of output growth and other economic variables during the ten years before and after economic crises (40–70 countries in connection with major global crises, and 16 individual country crises). 2 The findings are very clear: economic activity has a tendency to be much weaker in the decade after a financial crisis than in the decade beforehand. There are probably a number of explanations for this:  1  See http://www.kansascityfed.org/publications/research/escp/archive.cfm. 2  See Reinhart, Carmen M., and Vincent R. Reinhart (2010): After the Fall, http://www.kansascityfed.org/publicat/sympos/2010/reinhart‐paper.pdf. BIS Review 130/2010  1    GDP growth is often abnormally strong and, to a degree, unsustainable in the prelude to a financial crisis.   Financial crises are preceded by debt accumulation and followed by a long process of deleveraging.   Risk appetite subsides after a financial crisis, and what Keynes called “animal spirits” are tempered for a prolonged period of time.   Production capacity is destroyed in a financial and economic crisis.   Finally, economic policy becomes more complex, and there is more risk of error. Of course, these developments are not inevitable, and the ultimate outcome depends also on policy choices. For example, it is clear that a number of mistakes played a key role in shaping the disaster that unfolded following the crash of 1929.