We have said that the prerequisites for capital account liberalisation are macroeconomic stability, sufficient foreign exchange reserves, and a financial system that can stand on its feet without capital controls. The first of these conditions has been met, and the next will be met upon successful conclusion of the third IMF review. The prospect of meeting the third condition in the next few months has improved in view of strong interim earnings reports from two of Iceland’s large commercial banks and the recent Supreme Court judgment concerning the interest rate to be used for loans with nonbinding (illegal) exchange rate linkage clauses. But it would be a misunderstanding to assume that the timeframe can be measured in terms of weeks rather than months. We must receive the next tranche of the IMF loan after the third review, and we probably cannot pronounce the banks sound with respect to capital account liberalisation until late November. Furthermore, it is appropriate to bear in mind, as the recent unrest in the bond market shows, that there are short-term risks related to the removal of the controls; thus it is important that each step be well prepared. But if nothing unexpected arises, the time is coming closer, and preparation is underway within the Central Bank. BIS Review 130/2010  3  Of course, we won’t make much progress in lifting the controls or gaining access to foreign credit markets if the Icelandic Government is considered unlikely to be able to fulfil its foreign loan obligations.
But even excluding those price increases, inflation had moved up on account of, for example, a growing tendency for wage costs to rise too rapidly. With a quick global economic recovery, there was a risk of the Swedish economy becoming excessively strained too soon in the upward phase, so that inflation would start rising again. During the summer, however, the perspective has changed and it looks as though the recovery in the world economy has recently slowed. Probable explanations for this are the widespread financial turbulence and the concern about the mounting security policy risks. Most of the evidence therefore points at present to the international economic upturn being slower and more protracted. The Swedish economy, which, as I said, has coped fairly well to date, cannot of course ultimately remain immune to developments in the rest of the world. Pronounced stock market fall Thus, the developments in financial markets have heightened the uncertainty about the future paths of consumption and investment, both in the rest of the world and in Sweden. If the international stock  BIS Review 59/2002  1  exchanges were to go on falling or the effects of the decline to date turn out to be more extensive, the scenario for the Swedish economy could become considerably less favourable. A closer look at stock markets shows that since the high in spring 2000 there has been a major fall around the world.