While Iceland's financial woes are a small slice of the global insolvency pie, nonetheless the country has generated a flurry of press over their banking failures, with sensational titles like "Iceland exposed: How a whole nation went down the toilet".
Those reading of Iceland's seemingly quick transformation from economic boom to financial pariah might conclude the meltdown is Iceland's own doing--without any contributing factors. Certainly Iceland itself played a large role in this crisis, but it does fit within a larger context that deserves some scrutiny.
As an island nation with few resources of their own, Iceland is particularly vulnerable during economic booms because it must pay for many imported goods using currency like the euro. As the current boom picked up steam, Iceland had to borrow ever more euros to maintain the pace of development. Thus began a "virtuous cycle" of price inflation in their currency, with escalating foreign credit needed to cover retail expenditure. Foreign banks were all too eager to lend, but obviously there was only so much wealth for Iceland to borrow against; few considered the downside risk during the growth phase. Notably by Iceland's bankers and ministers, who should have better looked after Iceland's financial position.
Apparently, quite a few UK investors lost money in Iceland, and articles like above are self-explanatory in that regard. Obviously, Iceland screwed up big. But, If there is a larger context here, the situation with Iceland should serve a warning to any nation who overspends against foreign lending. Certainly there must be other examples.
--Just a few, incomplete thoughts taken from discussions with friends in Iceland and from my own reading on this crisis. As a balance to the British press, here are a couple of viewpoints on the meltdown from Iceland's perspective.
(interesting to read here how US-based REMAX became involved in hyping their housing bubble.)