The country of Iceland is the smallest economy within the Organization for Economic Cooperation and Development (OECD) with a gross domestic product (GDP) in 2007 of about $11.8billion. The Icelandic economy has been based on marine and energy resources. More recently, Iceland has developed a very strong services sector, which accounts for two-thirds of the economic output. Since the start of the decade i.e. from 2000, Iceland has experienced particularly strong growth in its financial services sector. Trade accounts for a large share of Iceland’s GDP, with imports accounting for 46% in value and exports accounting for 35% in value of goods and services of GDP.

Iceland’s main export item was fish and other marine products until the year 2006, when Iceland began to capitalize on its abundant thermal energy resources to produce and export aluminum. A combination of economic factors over the early to mid-2000s led to Iceland’s current economic and banking distress. In particular, access to easy credit, a boom in domestic construction that fueled rapid economic growth and a broad deregulation of Iceland’s financial sector spurred the banks to expand rapidly abroad and eventually played a role in the eventual financial collapse. Iceland benefited from favorable global financial conditions that reduced the cost of credit and a sweeping liberalization of its domestic financial sector that spurred rapid growth and encouraged Iceland’s banks to spread quickly throughout Europe.

The 2008-2009 Icelandic financial crisis was a major ongoing economic crisis in Iceland that involved the collapse of all three of the country’s major banks (Kaupthing, Landsbanki, Glitnir) following their difficulties in refinancing their short-term debt and a run on deposits in the United Kingdom. Relative to the size of its economy, Iceland’s banking collapse was the largest suffered by any country in economic history of the world. This was the main reason why Iceland had to suffer so much in the crisis.

Commenting on the need for emergency measures, Prime Minister Geir Haarde said on 6 October 2008, “There [was] a very real danger … that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could have been national bankruptcy. He also stated that the actions taken by the government had ensured that the Icelandic state would not actually go bankrupt. At the end of the second quarter 2008, Iceland’s external debt was 9.553 trillion Icelandic krónur (€50 billion), more than 80% of which was held by the banking sector. This value compares with Iceland’s 2007 gross domestic product of 1.293 trillion krónur (€8.5 billion). The assets of the three banks taken under the control of the FME totaled 14.437 trillion krónur at the end of the second quarter 2008.