controls. through fiscal consolidation and reinforcement of its fx reserves ( see figure 10a ), iceland has seen a steep drop in the perceived risk of the sovereign as reflected in cds spreads. furthermore, the sovereign has been able to tap foreign capital markets twice, for a total of 2 billion us dollars, and use part of the proceeds to repay a significant part of the loans associated with the imf programme ahead of schedule. fx reserves and other central bank fx assets currently cover scheduled sovereign foreign debt repayments beyond 2022 ( see figure 10b ). the balance of payments problem that the current controls on capital outflows are intended to address therefore lies elsewhere. it is best demonstrated by figure 11, which shows, on the one hand, liquid isk assets held by nonresidents, which amount to 22 % of gdp, and the old banks ’ isk assets, which will, in the absence of other action, accrue mostly to foreign residents and may be added to the overhang of potentially liquid offshore kronur. given that the underlying current account surplus is in the region of 3 – 4 % of gdp and that there are a lot of other debt repayments laying claims to it, it is clear that if these amounts were to be released overnight, we would be at risk of another currency crisis, with potentially significant financial stability implications. that is why these assets must be released after significantly reduced valuations in terms of foreign currency or must flow out over a much longer period. the more their value is reduced in terms of foreign currency, the faster can the controls be lifted. bis central bankers ’ speeches the icelandic authorities have a strategy in place to lift the capital controls gradually, as conditions permit, without unduly undermining exchange rate and financial stability. the strategy is currently under review. it is clear that the process will be significantly affected by how the krona problem associated the winding up of the old banks is dealt with, as an amicable solution could greatly expedite the removal of the controls. but the basic thinking will remain the same. the first element is to secure the framework conditions for lifting the controls, such as at least balanced public sector finances, an underlying current account surplus, and adequate fx reserves. all of this is either in place or well on its way. the second element is to put in place the economic policy frameworks and prudential rules that will make it possible for iceland to deal with the risks associated with free and volatile

. the outlook is for a substantial reduction in the rate of economic growth in 2001. clear signs of overheating were seen in the labour market. seasonally adjusted unemployment decreased from 1. 5 % in january 2000 to 1. 2 % in july, then remained unchanged to the end of the year. one response to labour shortages was to bring in workers from abroad, which together with longer working hours has prevented wage drift from being felt on any great scale. labour market surveys, however, show contrasting pictures in the greater reykjavik area and regional iceland. there is an obvious shortage of labour in various fields in the urban southwest, while availability of employment declined in the regions. great pressure built up in the real estate market, largely reflected in a rise in real estate prices in the greater reykjavik area. prices peaked at the beginning of 2000 after increasing by almost 24 % over a twelve - month period. this rate of increase has now begun to slow down, and by the end of december real estate prices had risen by 13. 3 % over the preceding twelve months. credit expansion in the course of the growth period, generous wage agreements were made which boosted real disposable income. the greatest increase in real disposable income was in 1998, or 7. 2 %. otherwise it rose by 4 - 5 % annually until last year, when the figure was close to 2 %. over this period, iceland stock exchange has gone from strength to strength. an important equities market has evolved in iceland, and share prices followed an upward trend until last year. greater real disposable income and rising share prices, which at least for a while increased shareholders'confidence in their own prosperity, fuelled growing optimism among consumers and investors. at the start of the period economic growth was sustained in particular by investments in business sectors such as power - intensive industry and fisheries. this gradually changed in character and for a while growth was primarily borne up by private consumption and related expenditure. last year capital formation increased more than had been expected, however, by an estimated 9 % during the year. private consumption rose somewhat more than real disposable income, and household debt increased by 14½ % in real terms, and as a proportion of disposable income from 146 % to 163 %. the combined impact of all these factors was to put pressure on iceland's credit system, not least the deposit money banks which have been lending immoderately. in the first half of 1999