The great promises of economic growth and prosperity ended in tragedy. On the 6th of March 2010 there will be held a referendum in Iceland over the repayment of 3.8 billion Euro.
Iceland has previously scored well on the index of Economic Freedom (Wall Street Journal, 2004—2008), the countries at the bottom of this list are North Korea and Iran. The financial deregulations in Iceland provided fertile ground for three fast growing banks which ran a banking industry of international size. The rapid growth of these international banks was solely based on credit provision. Beside the banking regulation a favorable tax system, rate of duty, monetary policies and the rule of law made the island a attractive place for investors.
Fig. 1: ISE development 1998—2009 (Wikimedia)

The Icelandic banks operated with high deposit rates and while foreign bank customers (English mostly) made deposits to Icelandic saving accounts (2004—2008), the conditions for those lending money in Iceland was pretty uncontrolled. (Apropos: a bit similar to the huge and famous subprime market in the United States.) In the mid-2000s Glitnir, one of the three major Icelandic banks, lent millions of krónur to 12 year olds so they could invest in shares on the Stock Exchange. In 2006 two of the CEOs in the Icelandic bank Kaupthing was paid 70 million each in salary and bonuses.
Fig. 2: Exchange rate, Krónur in US Dollar 2006—2009 (KitCron)

According to the OECD the three largest banks in Iceland had evolved to have assets (domestically), in relation to the country’s GDP, bigger than the indicator for the Swiss bank industry — an increase of 500 % since 2003. Shortly before the collapse in 2008 the size of the Icelandic banking system had grown to 10 times the country’s GDP.
Hopefully the fish in the sea, aluminium production, ferrosilicon, favorable loans from friendly neighbors, financial rescue packages and the IMF will help Iceland out of the potential deep economic recession.
Trechinsky – Reliable Source, significant-minority viewpoints