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ONE word on every tongue in Iceland these days is kreppa. Normally it means to be “in a pinch” or “to get into a scrape”, but when it is applied to the economy, it becomes “financial crisis”. In time kreppa may become the word that conjures up the disastrous meltdown that is now taking place in the country's economy.

Iceland's kreppa has been long in the making and, at least for some, widely anticipated. The economy has wobbled a few times in recent years. But few could have predicted the speed or ferocity with which the country's banking system, credit rating and currency collapsed under the pressure of the credit crisis.



After a wobble in markets in 2006, when the main banks struggled to finance themselves, both the banks and the country have been trying to steer back to safer shores—the banks by gaining foreign deposits to back their assets abroad and the country by raising interest rates to try to cool the economy.

In the end, however, the banks could not make it to safety. Stymied by the frozen credit markets, they were unable to roll over their debts. Panic spread after the government stepped in and partly nationalised Glitnir, the third-largest bank. Its currency tumbled and the cost of insuring its national debt against default soared. Having tried to prop up one bank, it soon had to seize the others, Landsbanki and Kaupthing. And its initial response—which included announcing efforts to peg the currency to the euro, despite lacking the reserves to defend it, and trying to secure a loan from Russia—served mainly to confuse.

Iceland's rapid rise and even faster fall has been viewed from afar as a parable of greed and hubris, in which a nation of farmers and fishermen borrowed too much and are paying the price. But that is to draw false comfort. Although Iceland represents an extreme case of a huge financial system towering over a small economy, other states suffer from similar imbalances. They differ only in scale, but not substance. Kreppa may be an Icelandic term, but it translates.