WHAT!?

STRICTLY CONFIDENTIAL
To the Governors of
Sveriges Riksbank, Danmarks Nationalbank and Norges Bank
The purpose of the swap facility is to strengthen confidence in the Icelandic economy in the short term, thereby
providing a window for addressing fundamental issues. The swap facility is not intended to be drawn upon.
If the swap facility is drawn on, it will be used to increase available liquid foreign exchange reserves. If drawn on,
the facility will be used pro rata and not for exchange market intervention, nor will the funds be used for recapitalization
of banks. Should recapitalization become necessary, the Government, while not subsidizing the banks or
shareholders, will use other funds for that purpose.
In order to build confidence and to ensure stability in the financial sector and at the macro level, we intend to
support the suggested precautionary swap facility by taking the following measures:
1. To increase available foreign exchange reserves, the Government will, with urgency raise EUR 1–2 bn. If the
swap facility is drawn on, the Government will borrow an amount commensurate to the total amount of swap
transactions.
2. The Central Bank and the Supervisory Authority will use their powers to pressure the banks to reduce the
overall size of their balance sheets, in line with the measures suggested by the IMF.
3. In order to increase the effectiveness of monetary policy and to remove distortions, a credible plan for the
restructuring and reform of the Housing Finance Fund system will, with urgency, be formulated and made
public.
4. To maintain fiscal prudence and to avoid further net-borrowing our intention is to keep the public debt level
at its current low level as well as to strengthen the fiscal framework along the lines suggested by the IMF. We
will consider how to address the concerns on real wage clauses in the wage settlements.
5. Given the vulnerabilities of the financial system, an IMF FSAP update is welcome to assess the situation in more
detail. The forthcoming Article IV consultation discussions also provide a welcome opportunity to assess the
overall situation.
6. The Central Bank of Iceland will keep participating central banks fully and promptly informed of the
measures listed above