In flailing iceland, disbelief and regret

People go insolvent all the time. Companies do, too. But state?

The global financial crisis has laid waste to some major banks and other financial institutions in the United States and Europe, but Republic of Iceland may be the first state to face the prospect of going bust along with them.

After a decade-long binge in which Republic of Iceland's banks, and some of its citizens, expanded beyond their means, the bill has come due. While the full consequence of the potentiality crash have not hit yet, some Icelanders like Bubbi Morthens are already feeling the pain.

"There is a lot of fear in society and there are people who are losing everything," Morthens said wed after vocalizing at an ad lib midday concert in telephone exchange Reykjavik intended to lift people's spirits.

Morthens is a former fish industry worker turned rock vocalist who is now known as the Elvis of Republic of Iceland. Like many of his compatriots, he did well when Republic of Iceland was horseback riding high, accumulating considerable wealthiness.

Then, the financial crisis gripping his state intensified last month. The authorities seized control of Republic of Iceland's third-largest bank. Morthens said he lost his life economy, which he had invested mostly in the bank's stock.

"What is important at a time like this is not pick out whom to blame," he said. "We have a authorities that is trying to do their best, but we will have to see what they come up with. Maybe it is a new dawn for Republic of Iceland."

Government effort to get ahead of the job cascading through its financial system have not restored confidence. In just 24 hours, for case, it abandoned an attempt to peg its currency to a handbasket of others.

And on Th, the authorities seized Kaupthing Bank, the state's largest lender, effectively completing the nationalization of the banking system.

In a country raked by icy North Atlantic winds and dotted with volcanoes and geysers, where people live with the threat of earthquakes and maritime disasters, few seem to be losing their cool over the financial crisis — yet.

Still, facing the imminent threat of "national bankruptcy," as Prime Minister Geir Haarde put it earlier this week, many people are talking about an epochal change. The only problem is that nobody knows what that might mean.

Nations have gone bankrupt before, of course, but Iceland always thought of itself as closer to Europe than the developing world.

What it means for Iceland so far, people here say, is that the days when the economy seemed capable of gravity-defying feats are gone. So are the days when Icelandic investors went on an international buying spree, adding some of the biggest names of the British and U.S. Retail industries to their portfolios.

So too, they conclude, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik.

"It's difficult; the landscape is very difficult," said Franch Michelsen, a watch dealer in downtown Reykjavik, as he took a break from cleaning his shop window on Wednesday.

People are still buying watches costing up to 100,000 Icelandic kronur, or about $900, he said. Above that price, there is a flight to quality similar to the one that has galvanized the financial markets. Buyers are apparently interested only in the biggest name, the most liquid investment, Michelsen said — in this case, Rolexes.

"People want something they can take anywhere in the world and sell it," he said.

This capital city of 120,000 still displays the fruits of the decade-long economic boom that followed the deregulation of Iceland's financial sector in the 1990s — hip cafes, lobster restaurants and stylish shops selling outdoor gear.

After the government nationalized Morthens's bank, Glitnir, in September, some people rushed to grocery stores, worried about possible shortages on a remote island where fish is one of the few foods that does not need to be imported.

But the shelves are still stocked, and any such hoarding this time around seems to have eased.

Instead, the financial situation is playing out in a parallel universe inside the offices of Glitnir and the other two big banks, Landsbanki and Kaupthing. The government said Thursday that Kaupthing's domestic deposits were fully guaranteed.

The government had originally planned to take a 75 percent stake in Glitnir, but said Wednesday that the bank was in even worse shape than it had thought and would be handed over to financial regulators. Landsbanki, the nation's second-largest bank, was nationalized on Tuesday.