Graph 1 shows the progress that has been made so far with fiscal consolidation and the plans embedded in the fiscal budget for 2011. Provided the plans are carried out, the consolidation involved will be impressive in both historical and international comparison, with a roughly 9 percentage point improvement in the non-cyclically adjusted fiscal balance from 2009 to 2012, even though there will be a significant slack in the economy for most of the period. Although it has been delayed and has faced obstacles on the way, the reconstruction of the domestic financial sector is far advanced. The three major commercial banks have been recapitalised, with foreign creditors taking a majority stake in two of them and the State  BIS Review 139/2010  3  holding a majority in the third. At the end of June, all three had capital ratios above 16%, most of it common equity. As a result, Iceland’s banks meet Basel III requirements more than two times over. The recapitalisation of the savings banks is in its final stages. In June of this year, however, question marks were raised about the capital position of the banking system when the Supreme Court of Iceland ruled that linking ISK loans to exchange rates was illegal. The banking system had a large number of such contracts on its books. The precise scope of the problem was uncertain, but more importantly, it was not clear what interest rates these loans should carry when they were no longer exchange rate-linked.
BIS central bankers’ speeches  1  Is France condemned to undergo a period of prolonged austerity? France must be extremely rigorous in the management of its public finances. A balanced budget must rapidly be restored, which presupposes in particular a structural reduction in government spending. Like many other countries, we have been living above our means for too many years. We need to stop accumulating debt. Growth will return if confidence does. And to reinstate confidence, we must guarantee that our public finances will be consolidated. 2  BIS central bankers’ speeches