In 1996, both agencies raised Iceland’s rating by one notch and in 1997 Moody’s raised Iceland’s rating again and that time into the double A category, to Aa3. The short-term rating is A-1+ and P-1. Both agencies have assigned ratings to the long-term obligations of the Republic of Iceland in domestic currency, Aaa and AA+. The improved rating demonstrated a welcomed recognition of the progress made in Icelandic economic management in recent years. In our own view, the rating improvements were overdue, first because our economic performance was in quantitative terms fully compatible with that of countries with a higher rating than Iceland, and, secondly, because it seemed obvious that the reception of Icelandic borrowing operations in the markets indicated that financial institutions have consistently assessed Icelandic risk differently from, or one might say more favourably than, the rating agencies. Structural changes Other speakers at this conference will touch on structural changes in the economy, particularly in the financial sector. I only wish to emphasise that it is not an overstatement to say that the Icelandic financial system has undergone radical changes since the middle of the 1980s. The market was deregulated, a stock exchange was established, and new institutions and financial services flourished. Last but not least, all restrictions on the movement of portfolio capital between Iceland and other countries were removed as alluded to earlier. The market is now similar to that in other developed countries, except for volume of course, while the role of the government through ownership of financial institutions stands out.
As time goes by, we will have to consider our options. A review of our future exchange rate policy will be particularly important. The possibility of Iceland at some stage joining a larger currency area should not be precluded, particularly if the political and economic cost of staying outside will be found to outweigh any advantage of maintaining an own currency. BIS Review 117/1999  4  Iceland and America Looking briefly in another direction, Iceland’s relations with the great continent in the West date back a thousand years. In recent decades, we have had important trade links with the United States. However, the relative share of trade with the US has declined significantly, or below 15%, since exports to the US peaked at almost 30% of total exports in the 1970s. Imports from the US also declined significantly from a high level around the middle of the century to around 10% of total imports in the most recent years. The number of American tourists has also declined in relative terms. Although the share of the US in Icelandic merchandise trade and tourism has declined, the US dollar still plays a significant role as a vehicle currency in Icelandic trade and foreign exchange transactions. Recent changes in the geographical pattern of trade and investment reflect the liberalisation of trade within Europe and the increasing globalisation of the world economy. Like other developed countries, Iceland has a most favoured nations agreement with the US and Canada.