Over the next three and a half years they grew to over $140 billion" (Lewis 2009, p.1). "By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry," while the real estate market, so vitally necessary to the lifestyle of most Icelanders, also expanded stratospherically. During the period from 2003-2008, "Icelanders amassed debts amounting to 850% of their GDP, compared with 350% in the U.S. (Lewis 2008, p.1). Iceland's speculation was more feverish than the U.S. because of the relatively modest circumstances of most Icelanders before, which fueled even more enthusiastic spending with easy credit. Furthermore, the fishing industry had always encouraged speculation and borrowing in the face of an uncertain future -- recklessness was part of the culture, despite the age-old nature of this industry. "With local interest rates at 15.5% and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3% interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising… By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen" (Lewis 2009, pp.2-3). "The top Icelandic banks failed under a mountain of debt in early October and the currency effectively ceased to trade, ultimately forcing Iceland to turn to the International Monetary Fund and several countries for $10 billion in aid" (Update, 2009, Thompson).

The one saving grace of Iceland may be the radical devaluation of the krona. Iceland never adopted the EU and its currency has fallen by half against the euro, making Iceland an attractive vacation destination for European and Japanese bargain-seeking tourists. Unemployment as a whole is below the Eurozone average, and while families are still under a crushing amount of debt, the nation continues to provide its citizens with unemployment insurance and free healthcare, part of the cradle-to-grave philosophy of the state. Those that say Iceland is in far from dire straits, despite its 2008 bankruptcy point to the fact that...

"Icelanders have taken a hit, of course. Unions have accepted 'real' wage cuts of 10%. Health care and welfare is being cut 5%, education 7%, and the rest 10%. This is comparable to what is happening in Ireland, but again there is a difference. Dublin faces a Sisyphean task as collapsing tax revenues force ever deeper austerity: Reykjavik is over the worst" as the devalued krona is forcing Icelanders to spend money virtually exclusively on domestic products, thus stimulating production and demand, while Iceland's exports seem absurdly cheap in comparison to those of EU nations (Evans-Prichard 2009). While far from 'out of the woods,' reports of Iceland's demise may be, if not greatly exaggerated, not nearly as bad as initially predicted.
References

Appendix: Iceland. (2009). Monetary bulletin. Sedla Bank. Retrieved November 29, 2009 at http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=4590

Evans-Prichard, Ambrose. (2009). Iceland's krona proves the magic wand as Europe ails.

Telegraph. Retrieved November 29, 2009 at http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5912682/Icelands-krona-proves-the-magic-wand-as-Europe-ails.html

Iceland. (2009). Trading Economies. Retrieved November 29, 2009 at http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=ISK

Iceland. (2009). OECD. Economic Surveys.

Lewis, Michael. (2009). Wall Street on the Tundra. Vanity Fair. Retrieved November 29, 2009 at http://www.vanityfair.com/politics/features/2009/04/iceland200904?currentPage=2

Sigurdardottir, Hildur Helga. (2009, March 20). Cold climate of recession takes icy grip on life

in Iceland. The Times Online. Retrieved November 29, 2009 at http://business.timesonline.co.uk/tol/business/economics/article3671358.ece

Smarason, Hjortur. (2009, March). Life in Recession Struck Iceland. Marketing Safari.

Retrieved November 29, 2009 at http://blog.scope.is/marketing_safari/2009/03/life-in-recession-struck-iceland.html

Update 1: Iceland posts modest GDP drop, bigger falls seen. (2009, March 6). Thompson

Financial News. Forbes.…