Could the Credit Crunch Sink a Whole Country?

The global credit crisis has spelled disaster for banks and hedge funds, but now worry is mounting that an entire country could go under. Yesterday the central bank of Iceland was forced to raise its interest rate 1.25 percentage points to 15% at an emergency meeting, reports the Financial Times. The surprise move was a desperate effort to curb runaway inflation and prop up the krona, a currency in free fall.

"We are a small open economy and we are obviously affected by moves in the international economy," Iceland's central bank governor said. Yesterday's rate cut saw the krona jump, but if confidence in the financial system continues to wane, the country's banks could suffer a run and spell serious trouble for the tiny Nordic nation. One analyst chose his words carefully, saying, "Let’s say Iceland is not in more danger than some Wall Street banks." (More Iceland stories.)