The Icelandic financial crisis of 2008–2010 was one of the largest banking collapses relative to the size of an economy in history. It began in late 2008 when all three of Iceland's major privately owned banks—Kaupthing, Landsbanki, and Glitnir—defaulted. These banks had expanded rapidly in the years leading up to the crisis, fueled by easy access to international credit. However, as the global financial crisis unfolded, investors lost confidence in the Icelandic banking sector, leading to a run on deposits in the UK and Netherlands and severe refinancing issues.
By mid-2008, Iceland's external debt had ballooned to seven times its GDP, and the banks' assets were over 11 times the national GDP. The Icelandic Central Bank lacked the capacity to act as a lender of last resort due to the outsized financial sector. Efforts to stabilize the situation, including the nationalization of Glitnir, failed. The government passed emergency laws in October 2008, allowing new banks to take over domestic operations while the old banks were put into receivership. This led to international disputes, most notably the Icesave controversy, over foreign depositors who lost access to their funds.
To stabilize the economy, the Icelandic government guaranteed domestic deposits, imposed capital controls, and secured a $5.1 billion bailout from the IMF and Nordic countries. Despite these measures, Iceland's economy contracted sharply, with GDP dropping by 10% between 2007 and 2010. The Icelandic króna lost significant value, and the stock market collapsed.
Recovery began in 2011, with GDP growth returning and unemployment gradually decreasing. By 2017, capital controls were fully lifted, and by 2018, Iceland's debt-to-GDP ratio was expected to fall below 60%, down from a peak of 85% in 2011. The crisis also led to significant political and social upheaval, including mass protests and changes in Icelandic governance.