Iceland is on the brink of becoming the first "national bankruptcy" of the global financial meltdown. Home to just 320,000 people on a territory the size of Kentucky, the island nation nationalized its second-largest bank Tuesday under emergency legislation and said it was negotiating a $5.4-billion loan from Russia to shore up the nation's finances amid a full-blown financial crisis. The central bank also loaned $680-million to Kaupthing, the country's biggest bank, to tide it through the crisis. Prime Minister Geir H. Haarde warned late Monday that the heavy exposure of the tiny country's banking sector to the global financial turmoil raised the specter of "national bankruptcy."
Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy. Investors are now punishing the whole country for the banking sector's heavy exposure to the global credit squeeze — its currency has gone through the floor, imports have fallen and inflation is soaring.
A full-blown collapse of Iceland's financial system would send shock waves across Europe, given the heavy investment by Icelandic banks and companies across the continent.