Protesters clash with police. Photo: pallih (flickr)

Is it possible for an entire country to actually go bankrupt? In Iceland's case, the answer appears to be a resounding 'yes,' setting the stage for concerns that other seemingly well-to-do Western countries may be quick to follow suit.

In case you haven't been following Iceland's increasingly deteriorating situation, the Cliff Notes version of the story is that a handful of entrepreneurs and banks borrowed more money abroad than what was sensible, and in the post-Lehman Bros. credit crisis, things have gone rapidly downhill from there. First all the major banks collapsed and became nationalized, followed quickly by the free-fall of the krona currency, and most recently several government officials have resigned after a series of angry demonstrations by citizens.

All this is especially worrisome considering that Iceland won the UN's "best country to live in" poll just last year. Now the appropriately-termed financial meltdown is hitting its citizens the hardest, as unemployment is expected to reach up to 11 percent this year (compared to 0.8 percent in December 2007). Their country's declaration of bankruptcy has caused many Icelanders to express anger over their government's mishandling of the economy and fear about their future. As one citizen put it, the situation is "kind of like in the Matrix, you wake up and realize everything was a lie." With higher mortgage costs, few jobs and rising food prices, half of Icelanders aged 18-24 are now considering immigrating to countries such as Norway and Sweden for work, further testifying to the severity of people's worries.

To try to combat the crisis, Iceland is now seriously considering applying for membership with the EU, a decided contrast to its centuries-old isolated and independent Nordic character. Suddenly, it no longer feels inconceivable to imagine other western countries forced to declare bankruptcy in the future, especially since Iceland's $1.6 billion loan from the IMF makes it the first western country to receive a loan from the IMF since 1976. Rising unemployment rates across the world raise the uneasy question of which country will become 'the next Iceland,' and when.

U.S. financial turmoil has been felt around the world. Photo: rednuht (flickr)

While the details of the government bail out are still to be agreed upon, what is clear is that business as usual on Wall Street has been transformed. This hasn't happened to our financial system in a long time — nearly all experts agree that change of this magnitude hasn't occurred since the Great Depression, or maybe ever.

And it's not just about the estimated $700 billion that is needed to provide some sort of stability for failing financial institutions, or the significant changes to the regulatory system that will surely result. The proposed deal also transfers an incredible amount of power to the Treasury Secretary, without the allowance of judicial review — this is unheard of in financial legislation.

This morning's report from NPR explains why it's so significant.