Just a little more than year ago, Icelanders were enjoying the good life: a healthy economy, relaxing mineral pools, a new ranking by the United Nations as the most developed nation in the world, and a new Björk album.

Today, Iceland's regulators have seized the country's three largest banks, its stock exchange has been halted, its interest rate stands at 15.5 percent, and it has been forced to turn to Russia, Sweden, and the I.M.F. in order to guarantee customer bank deposits.

How did the tiny Nordic island end up on the brink of collapse?

Iceland, it turns out, was run like an overleveraged hedge fund. A booming stock market and expanding economy led it to overplay its tiny little hand in the big international game of banking poker. It borrowed heavily from international sources, and it poured money into investments both domestically and abroad. Its three largest banks, Kaupthing, Landsbanki, and Glitnir quintupled in size since 2004, and Bloomberg estimates they now hold assets worth 12 times Iceland's gross domestic product.

To put that in the perspective of our own struggling economy, that's the same as if the combined assets of Citigroup, Bank of America, and J.P. Morgan Chase totaled some $160 trillion. Instead, they total around $7.4 trillion.

What's happened now that the global credit crunch has hit Iceland's lenders is that its banks can't cover their debts, and the country's economic structure is not equipped to repay them either. Its population is a mere 320,000—just a touch bigger in size than Cincinnati, Ohio.  

"What we have learned from this whole exercise is that it is not wise for a small country to try to take a leading role in international banking," Geir Haarde, Iceland's prime minister, told reporters yesterday. "We are too small to sustain a banking system that has become too big."

The country is hoping now that loans it can secure from Russia and others will help boost its foreign currency reserves and ease pressure on the weakened krona. The free-falling currency has made imports to the tiny island nation, where things were already expensive, even more difficult to afford.

Icelanders are preparing for a long and painful economic contraction. All forecasts are almost too grim to imagine. The country could go bankrupt, its economy could shrink by 10 percent, it may face inflation of up to 75 percent—none of these scenarios sound like the description of an industrialized nation.  

But the people of Iceland are tougher than most, as their Viking history has proven. They can sustain themselves during long winter nights on pickled herring and skyr, and the country prides itself on production of alternative energy. It also points to aluminum production as a source of exports, with Alcan and Alcoa both operating large plants there.

"These good times, these times of wealth, are a fairly short part of our history," one resident told the New York Times.

And now those good times are history.