When the conditions froze the global credit market Iceland's economic adversity became clear. In the autumn of 2008 Icelandic banks owed six times the country's total Gross Domestic Product which they were suddenly unable to refinance through new loans. The national economy suffered from the global banking conditions and a bankruptcy seemed a reality.
It all began as the Icelandic government took a 75% stake of the country's third-largest bank, Glitnir, after it faced significant funding problems. Icelandic interest rates skyrocketed to 15.5% while national currency krona freefall on the international currency markets was surpassed only by the Zimbabwean currency.
In October trading on the OMX Nordic Exchange Iceland of the six biggest financial shares was suspended. The government offered an unlimited guarantee for all savers and Iceland's parliament, the Althing, passed emergency legislation enabling the government intervention in countries financial system.
When the bank Glitnir was nationalized, foreign currency was running out quickly because international banks refused to lend more money to the national economy. The government soon took control of the country's second largest banks, Landsbanki. The British government brought the decision to call upon anti-terrorism legislation as a means of freezing Kaupthing assets in the United Kingdom. Iceland government response was harsh criticism and a lawsuit preparation, while in order to prevent total collapse Kaupthing, the biggest bank on Iceland, was nationalized as well.
As the events unfolded, Iceland's central bank raised key interest rate to 18% from 12% in late October. One month later the International Monetary Fund approved a $2.1 billion loan for Iceland, making it the first Western European nation which got an IMF loan since the United Kingdom in 1976. Meanwhile the annual rate of inflation reached a record high of 17.1%.
Protests against the government
The financial crisis in the country ignited protests, which have been referred as the Kitchenware Revolution because the majority of demonstrators banged pots and honked horns in order to disrupt the government action. Protesters in Iceland's capital Reykjavik have clashed with police during a demonstration over the handling of the financial crisis. Several hundred protesters gathered outside the city's main police station to demand the release of a man jailed in a previous demonstration. The man was later freed, after a fine he owed for a previous demonstration was paid.
The protests intensified on 20 January 2009 when thousands of people showed up to protest at the parliament in Reykjavik. Protesters were calling for the resignation of government officials, and for new elections to be held. The protests stopped for the most part with the resignation of the old right-wing government led by Prime Minister Haarde. New Prime Minister Johanna Sigurdardottir set out a new government's plan to rescue Iceland from complete financial ruin.
The Icesave referendum
The new government first issue was the repayment of the debts and negotiation of terms with Britain and the Netherlands as the largest interested parties. The deal that required each Icelander to pay around $135 a month for eight years, the equivalent of a quarter of an average four-member family's salary, was put on the national referendum after a strong public pressure.
The majority of voters viewed the deal as unfair result of their own government's failure to supervise and regulate the recklessness of a handful of bank executives. More than 90 percent of voters had rejected a $5.3 billion plan to pay off Britain and the Netherlands for debts created by the collapse of an Icelandic Internet bank, Icesave.