At this point, it is impossible to say what these banks’ next interest rate decisions will be. On Thursday, April 10, the Central Bank will publish its next issue of Monetary Bulletin, which will contain its newest macroeconomic and inflation forecasts. At that time, the Board of Governors will announce its next policy rate decision. The global financial markets have been in a state of flux in recent months, primarily because of the crisis in the US sub-prime mortgage market. Securitised assets based on sub-prime lending proved much more risky than previously believed, even by credit ratings agencies, which had given various collateralised debt obligations their highest ratings. But when they were put to the test, it emerged that they were far from reliable, and banks all over the world that had invested heavily in them lost staggering sums of money, amounts that are practically unheard of. In some instances, the losses were such that they compromised the banks’ equity position and forced them to seek out new share capital. A large number of banks have had to write off billions of US dollars, and some have even been forced to write off tens of billions. And in all likelihood, the effects will continue to emerge. Last year’s changes in the global financial markets were swift. For a long time, liquidity had been ample, interest rates low, and risk appetite high.
For Icelandic banks, it is therefore extremely important that CDS spreads decline, even though it is not clear what could cause it to do so in the current climate. 4  BIS Review 25/2008  At the end of last month, Moody’s Investor Service announced that the outlook for the credit ratings of two Icelandic banks had been downgraded from stable to negative, and that the outlook for the third bank remained negative. A decision on whether their credit ratings would be changed was to be expected within the month. This announcement came perhaps as no surprise, in view of the changes in the banks’ credit ratings from Moody’s over the past year. If they are downgraded by one notch, Glitnir and Kaupthing will revert to the credit rating they enjoyed before Moody’s announced the implementation of its so-called Joint-Default Analysis methodology early last year. Landsbanki’s current rating is two notches above that a year ago. In contrast with Moody’s, Fitch Ratings recently affirmed its ratings for Iceland’s banks and changed its outlook for Kaupthing Bank’s rating from negative to stable. It should be noted that many banks have been subjected to changes in their credit rating outlook. For example, Standard & Poor’s changed its outlook for many of the world’s largest and bestknown banks from stable to negative. Among the banks affected were Deutsche Bank, Dresdner Bank, Barclays Bank, UBS, Credit Suisse, and others of their ilk.