It was the first full week of October 2008, and stunningly, all three major Icelandic banks collapsed between Monday and Thursday. The fall of Lehman Brothers was fresh news. But unlike Lehman in the U.S., these three institutions dwarfed the economy of Iceland. To have a similar magnitude collapse would have required 300 simultaneous Lehman Brothers bankruptcies in the United States. The Icelandic stock market dropped almost 100% in the wake of this devastation.
The effects of this super-collapse were felt immediately by each and every Icelander. The currency lost around half of its value during this time, which meant that inflation took off. As nearly all mortgage debt in Iceland is either indexed to ISK inflation or to a foreign currency, the indebtedness and monthly housing payment for the whole country skyrocketed, nearly doubling overnight. Supermarket shelves began to go bare, as imported foodstuffs could no longer be paid for. There was a quiet run on the banks for domestic cash; foreign cash was suddenly no longer available at all. Many lost their financial sector jobs that first week, and the knock-on effect into the rest of the economy rippled out from there. A European wholesaler of automobiles sent a “ro-ro” ship to Iceland and every unsold new car was driven aboard and shipped away that autumn.
It would be a grievous mistake to write off the Icelandic financial crisis of 2008 as not more broadly
