The double-digit deficits in the years before the crisis have been replaced by sizeable surpluses from 2009 to this day. Iceland had significant fiscal surpluses in the years leading up to the crisis. As expected, the crisis had a big impact on government finances: through the direct fiscal costs of the banking crisis, the loss of tax revenue, and higher unemployment expenditures as the economy went into recession. This impact was big as can be seen on Figure 6 showing the direct and indirect impact of selected banking crises on government debt and fiscal balance. But yours was bigger! A deficit on the central government amounting to 8% of GDP opened up in 2009. It had to be financed domestically. Capital controls helped in that respect. To build confidence and open external market access, a medium-term fiscal consolidation plan was implemented as a part of the programme with the IMF. In 2009, automatic stabilisers were mostly allowed to do their work, but in 2010 a phased deficit reduction plan set in, with a primary surplus targeted for 2012 and an overall surplus for 2014. This fiscal consolidation was sizeable in international comparison, as can be seen from Figure 7, but it did not derail the recovery that began around the middle of 2010. It helped that monetary policy could be relaxed over the course of 2010, as the closure of loopholes in the capital controls in late 2009 contributed to the stabilisation of the exchange rate.
This is a balance of payments problem, as 94% of the claims on these banks are foreign and only 6% domestic, whereas 41% of the assets are domestic, including 21% in krónur (See Figure 11). Taking into account the part of these assets that are already financed in foreign currency, we get the result that unfinanced domestic assets that could revert to foreign residents with the unwinding of these estates will amount to 25% of GDP (see Figure 12). When considering the complication that this creates for Iceland, you should bear in mind that it is partly because the resolution of the third-largest bankruptcy in the history of mankind is taking place in one of the smallest countries in Europe. Therefore, potential outflows amounting to 40% of GDP might seek a speedy exit if we were to lift the capital controls tomorrow. If our relatively large FX reserves (30% of GDP) were our first line of defence, they would be wiped out completely, and then the exchange rate would give way, with potentially serious consequences for economic and financial stability in Iceland. We are currently working hard on solutions to this problem, and such solutions do exist. From a logical standpoint, the solution must take the form of either a significant reduction before early exit or a secure longer-term holding period before the controls are lifted. I am coming towards the end of my talk and will have to leave discussion of the lessons learned for the Q&A session.