BIS Review 7/2008  7  Chart 5: Mortgage arrears and possessions rates  Chart 6: Household secured and corporate credit availability Net percentage balances(a) Easier credit 30 Corporate 20  Percentage greater than 3 months in arrears  Percent  Household Secured  7  0.9 0.8  6  10  0.7 5  0.6  0  4  0.5 0.4  -10 -20  3  Possessions (LHS)  -30  0.3  2  0.2  Arrears (RHS)  1  0.1 0 1990  -40 -50 -60  0 1993  1995  1998  2001  2004  2006  Source: CML Back cast data before 1994  Tighter credit  Q2  Q3  Q4  Q1  Q2  Q3  Q4  Q1  Reported change, past three months Expected change, next three months Source: Bank of England Credit Conditions Survey  Chart 7: Quoted mortgage spreads  Chart 8: Mortgage product availability (a)  Thousands  Basis point spread to funding rate 250 SVR  Credit impaired Prime  200 150  Bank Rate Tracker 100  5 yr fixed  50 0 2 yr fixed -50 2001  2002  2003  2004  2005  2006  2007  Source: Bank of England. (a) SVR mortgages spread over one month lag of Bank Rate; Tracker mortgages spread over Bank Rate; 2 yr, and 5 yr fixed rate mortgages spread over one month lag of 2 and 5 year swap rates.
This is quite understandable. And there is no reason to soft-pedal the fact that the capital controls are harmful to the Icelandic economy. It is difficult to make a sufficiently accurate estimate of the magnitude of the negative effects, and I am not sure that the assessments made thus far would all stand up to close examination. One thing we do know, however: the detrimental effects escalate as time passes. But we must understand the nature and scope of the problem if we are to make a reasonably fair assessment of the time that has passed and of how quickly the controls can be lifted. In this context, I have found it helpful to explain to foreign observers that the collective collapse of Iceland’s three large banks is thought be the third-largest bankruptcy in history. The Lehman bankruptcy was larger, and its settlement is not complete. Our own settlement is taking place in one of the smallest countries in the world and is associated with a severe balance of payments problem, whereas in the case of Lehman, balance of payments problems have relatively little relevance. Another point that I make is that if all of the estates’ króna-denominated assets were added to the current stock of offshore krónur, the combined stock would increase to about half of GDP. Of course, we will not let that happen, but if it did, the new “overhang” would be much larger in proportional terms than the UK’s post-war sterling overhang, which totalled nearly a third of its GDP.