Why Iceland’s market is melting

Few countries have enjoyed a rise as meteoric as Iceland's over the past few years. But it could collapse even more quickly, as the economy dices with what Iain Dey of The Daily Telegraph calls a "Northern Rock style-banking crisis".

Kaupthing, its largest bank, is now rated by debt markets as about seven times more likely to default than its European peers. Thanks to cross holdings, whereby Iceland's main firms own stakes in its banks and vice versa, a banking collapse could spark a widespread meltdown.

International money has flooded Icelandic banks in recent years, drawn by high interest rates. But investors are pulling out on fears the hugely-leveraged economy will suffer as credit tightens, sending the currency lower the crown is at record lows against the euro and hurting the stockmarket, which is down nearly 50% on last year's July high.

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The boom was driven by "a flood of money being loaned at cheap rates, combined with deregulation", only faster and more furiously than elsewhere, warns Simon Watkins in The Mail On Sunday. Let's hope the market's fall "is also faster and more furious than anything we will ever see in.

For more on why Icelandic banks are looking risky - and the banks which look much safer, see: How to spot the riskiest banks

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