These spreads began to rise following the turnaround in the international markets and they had a tendency to rise more on the Icelandic banks than on other banks with every event or news that prompted a general rise in risk aversion and in CDS spreads. The spreads peaked around the end of March and have come down quite considerably this month. The CDS market is an opaque and unregulated one but, nevertheless, CDS spreads are a reference for the terms that would be available to the banks if they were to go to the market. In our view, the CDS levels on the Icelandic banks have been out of proportion to their underlying financial strength, their credit rating and spreads on comparable banks in other countries. It also seems that the CDS market is thin, turnover in CDS transactions on Icelandic banks appears to be limited. One reason behind relatively high CDS spreads on Icelandic banks maybe the fact that a sizeable amount of Icelandic bank bonds issued in recent years ended up in CDO´s which have been in a process of being unwound over the last few months. However, this alone does not explain the very high spreads. It is also quite remarkable that the CDS spread on the Republic of Iceland rose very substantially, even to 400 to 500 points when it was at its highest earlier this year. This happened despite the fact that on a net basis, the Icelandic Government has no external debt.
Ingimundur Friðriksson: The Icelandic economy and financial system in April 2008 Presentation by Mr Ingimundur Friðriksson, Governor of the Central Bank of Iceland, at a meeting of the Board of Directors of the Norwegian Financial Supervisor, Kredittilsynet, Reykjavík, 24 April 2008. *  *  *  It is a great pleasure for me to have been invited to speak to the Board of Directors and management of the Norwegian Financial Supervisory Authority at its meeting in Reykjavík this week. There are good reasons for the Norwegian Supervisor to come into direct contact with both colleagues in the Icelandic Supervisory Authority and with leaders of financial institutions in general. Much has been written and said about the Icelandic economy and financial system of late, some of it accurate, some of it not so accurate. For the outsider, it may be difficult to separate the accurate from the inaccurate. As requested, I will in my presentation give an overview of recent economic developments and prospects and then touch briefly on the Icelandic financial system. Economic developments and prospects As you know, Iceland is one of the highest income countries of the world and one with a highly developed infrastructure and institutional framework. You may also know that Iceland is prone to greater economic fluctuations than most or all highly developed economies. In the 1990’s, the Icelandic economy was deregulated and liberalised and that process was largely completed with the full privatisation of the Icelandic commercial banks shortly after the turn of the century.