Iceland's economic crash hit fast and hard

REYKJAVIK, Iceland -- This is what a rapid financial meltdown can do.

The government seizes banks, leaving shareholders luckless and foreign depositors unable to touch their money. The stock market is shut down. The currency is in free fall, leaving mortgage holders who took out loans in foreign currency paying double. Prices on imported goods are on the rise.

This is the situation in Iceland, where a small, struggling government is even turning to the Kremlin to prevent bankruptcy after it became the first country to succumb to the global financial meltdown in a matter of days last week.

"No Western country has crashed in peacetime as quickly and as badly," says Jon Danielsson, an associate professor of finance at the London School of Economics. "This shows the degree of problems facing the global financial systems and how governments must do all they can to stabilize them."

Other countries should take heed, Danielsson and other financial analysts say. On Thursday, forecasting firm Global Insight listed Hungary and Ukraine as having the most shaky banking systems.

"Both (Hungary and Ukraine) have similarities with Iceland," says Toby Wight, a Global Insight analyst. "The banking sector in both countries is fragile, with high levels of foreign borrowing and high levels of foreign currency loans."

A quick unraveling

Iceland's crash marks the end of a decade-long success story in which the big banks in this tiny Nordic country, which has a population smaller than Wichita's, grew to have assets nine times greater than the nation's entire economic output.

The unraveling has taken place at breakneck speed. On Sept. 29, Iceland's government stepped in to take over the Glitnir bank after the bank failed to obtain loans to cover debts amid the global liquidity freeze.

Last Monday, the Iceland Stock Exchange halted trading in shares of six major financial institutions as the government drafted emergency plans to try to stem the growing debt crisis.

On Tuesday, the government seized Landsbanki bank — guaranteeing Icelanders' deposits but not those of foreigners. That left 300,000 British customers unable to draw about $6.91 billion out of Landsbanki's Internet subsidiary Icesave.