Relative to the size of its economy Iceland`s systemic banking collapse was the largest experienced by any country in the history. In the three years preceding the crises the major three Icelandic banks had multiplied in size resulting in a banking sector that was disproportionately large in comparison with the size of the economy of the country.
When it was discovered that Icelandic banks were in hold of many poisonous papers from the US (see also: collateralized debt obligations hiding NINA debitors with “no income, no assets” behind an intransparent construction; papers that were rated with AAA by American rating agencies) trust was lost and many short term liabilities could not be re-financed. Consequently the international finance crises hit the country hard.
The crises management of Iceland driven by a policy in the interest and demand of the Icelandic folk on the other hand can be seen as exemplary (Wikipedia recording ‘significant political unrest’). After a severe economic depression from 2008 to 2010 and the krona, Icelands currency, having devaluated in free fall economic recovery has started in 2011 continuing firmly up to now, much earlier than in other European states also hit by the finance crises of 2008. Instead of letting the public pay for the losses in the form of a ‘bad bank’ the Icelandic state has saved the good core business from inside the country in a ‘good bank’ for the public.
The three major Icelandic banks Kaupthing, Landsbanki and Glitnir were put into receivership and liquidation so that shareholders and foreign creditors were the first who had to pay for the losses. While former bank managers have raked in high dismissal wages in other countries they got an arrest warrant in Iceland. In October 2008 new public banks were founded taking over the domestic operations of the three banks owned privately until then. Half a million depositors in foreign branches of Icelandic banks lost access to their accounts. This was bitter news for people from abroad who had intrusted their savings to Icelandic banks although it needs to be said that these depositors had profited from excessively high interest rates before. They lost the Icesave dispute because the European Free Trade Association Surveillance Authority ruled in 2013 that Icelandic banks were not oblidged to pay Dutch and British depositors their minimum deposit guarantees back. 25% of the population had signed the "Icelands are not terrorists" act in October 2008 when Gordon Brown tried to use the Anti Terrorism, Crime and Security Act from 2001 in order to freeze Landsbanki holdings in the United Kingdom. Basically his own government could easily have paid out the minimum deposit guarantees on its own.
At the other hand this is bad news for all European savers though it must be stated that under the harsh conditions of the Icelandic finance crises the state of Iceland would not have been able to guarantee for savings from abroad while the value of its own currency was in free fall. Foreign currency transactions were virtually suspended and the market capitalization of the Icelandic stock exchange dropped by more than 90%. The Gross Domestic Product lost by 10%. Domestic deposits were saved while strict capital controls were put in force to stabilize the value of the Icelandic krona. The IMF gave Iceland a bailout support of 5.1 bio. USD requiring strict austerity measures and tax hikes. Finally Icelands application for membership in the European Union is said to have helped to restore the credibility of the country at the financial markets. It needs to be seen as just that shareholders and those who had profited from high interest rates before had to pay in the crises. This is just the usual rule of business risk.