Last month Moody’s issued a Special Comment on Iceland 2 , bearing the title “Iceland’s AAA ratings at a crossroads.” The Special Comment provided grounds for the credit rating Moody’s awarded Iceland – the highest the agency gives. In particular, it examined the ability of the Icelandic government to weather serious financial shocks and concluded that the government was able to do so. It also pointed out that further international expansion of the Icelandic financial system could strain that capacity. The report suggested that it might be worthwhile to examine the possibility of fortifying the Central Bank’s foreign reserves, establishing a co-operative relationship with central banks in countries where Icelandic banks have extensive operations, and perhaps tightening the framework for the banks liquidity management. All of this is being considered. I wish to emphasise, however, that here in Iceland banks are subjected to more stringent liquidity requirements than banks in many other countries. Liquidity rules were set by the Central Bank a decade ago, and monitoring is carried out to ensure that individual banks abide by them. In addition, the Financial Supervisory Authority set its Guidelines on Foreign Currency Liquidity Management late in 2004. The objective of the Guidelines was to promote careful practise as regards liquidity management, and they contain 10 fundamental criteria for best practise. Since that time, the Financial Supervisory Authority has ensured that companies adopt these criteria.
Research indicates that a fall on the stock market affects household confidence relatively quickly, that is already after two to four weeks.5 The indicator of Swedish consumer confidence in the economy published by the National Institute for Economic Research tends to fall when the Stockholm stock exchange falls (see Figure 6). There may therefore be good reasons for believing that the recent falls on the stock markets of the world are one of the reasons why the Swedish households have become more cautious and are expected to increasing their saving. Financial turbulence has also led the companies to lower their expectations regarding the period ahead and to begin to postpone investments. All in all this has a dampening effect on economic activity in Sweden. High sovereign debts abroad affect Sweden As we have noted, the level of debt is high in the euro area and the United States. Following many years of budget deficit, what were in many cases already weak public finances were further undermined in connection with the financial crisis of 2008–2009. In 2009, the average budget deficit in the euro area amounted to 6.4 per cent of GDP. This figure fell to 6 per cent  5  See for example Jansen and Nahuis, 2003; Kremer and Westerman, 2004; and Beckmann, Belke and Kuhl, 2011. BIS central bankers’ speeches  7  in 2010 and is expected to be 4.4 per cent in 2011.