Bara Kristinsdottir for The New York Times
Updated: July 9, 2012
Iceland is a small but rugged country far from anywhere that suffered from financial wreckage as severely as any in the developed world after its overstretched banks failed in 2008. In a matter of weeks after the banks’ collapse, the unemployment rate jumped to 10 percent, house prices fell, the currency plunged and inflation surged.
During the boom years, Iceland became a nation obsessed with banking. The success of the nation’s banks, however, was deceptive. The economy was fueled almost entirely by foreign money. Then, as the global financial infrastructure teetered on the verge of collapse, the bonds came due, and Iceland’s banks couldn’t repay them.
Depositors in other countries raced to pull their money out of Icelandic banks. The government didn’t have the resources for a bailout; the banks failed. The government did guarantee that Icelanders would...