Iceland: The country that became a hedge fund

    On the morning of Oct. 7, Oddsson announced to the public that Ambassador Tatarintsev had called him earlier in the day to tell him that Moscow was providing a $5.2 billion loan. Putin, he said, had personally signed off on the deal, and the rate would be 30 to 50 points above the London interbank offered rate.

    The correction from Moscow came within hours: The Russians were interested in offering a loan, but no final decision had been made. What happened? Icelandic sources say that Ambassador Tatarintsev had actually received the equivalent of a preliminary term sheet for a loan that morning; Oddsson jumped the gun. On Nov. 19, Iceland announced that Russia would join Scandinavian countries in contributing $3 billion on top of the IMF loan.

    The end of the world is a staple of Icelandic myths, where it's known as Ragnarok - the doom of the gods. Life in Reykjavík can sometimes feel a bit post-apocalyptic these days. Downtown at the once-hot 101 Hotel, business has slowed to a trickle of foreigners.

    Sitting at the nearby Café de Paris, Gunnar Sigurdsson, who works in the marketing department of an ice cream factory and moonlights as an amateur theater director, complains that his mortgage payments are shooting up even as the value of his apartment is tumbling. He's already accepted a 10% pay cut at work.

    He's never before been involved in politics, but in mid-October he organized a town-hall meeting with members of Parliament to talk about what had happened and what happens next. Several hundred people showed up to vent. "People are angry about everything," he says.

    Foreign currency is scarce and being rationed by the central bank, with the help of a team from J.P. Morgan, making it hard for Iceland's remaining businesses to get financing for their operations. But the biggest problem is image.

    "It will take time for foreigners to forget," says Hördur Arnarson, CEO of machinery firm Marel Food Systems, one of the country's leading exporters. Arnarson believes it was a mistake for the nation to have its own currency, and he strongly favors Iceland joining the European Union and adopting the euro as soon as possible.

    Iceland still has some powerful export sectors in fish and aluminum. Its national pension system has taken some hits but remains well funded. There's even one bright spot to the currency collapse: Iceland's yawning current-account deficit will be transformed into a surplus within months.

    "It's a bleak picture," Prime Minister Haarde says, "but it's not unmanageable." In Icelandic folklore, after all the havoc and destruction of Ragnarok, a new, cleansed world rises from the sea. Icelanders are hoping that such rebirth isn't just the stuff of mythology.