Currency falls sharply.

Foreign banks cut credit lines.

"Last week ... US investors refused to roll over loans to the country's top three banks." (FT)

Local banks argue that they only thing to fear is fear itself.  Kaupthing:

"The only serious risk this bank faces now ... are persistent misconceptions that are kept alive and thrown at us time and again.  We have to join forces and face this risk upfront to avoid these malevolent remarks about our bank growing into an established cliché and becoming a self-fulfilling prophecy."

They better have lots of liquid foreign assets that they can sell to pay off their maturing debt, as they claim.   Liquidity does matter.

Local analysts claim that vicious foreigners (the Danes apparently know how to offend without publishing a cartoon ... ) don't understand the local economy.   Politicians too.

Iceland's PM Halldor Asgrimsson:

"There can be great hysteria, with people all over the world sitting in front of monitors and computers, and there are all kinds of things being communicated, and at times the action can be too fast for anyone to handle.  .... I am not aware of that Danske Bank has conducted any business to speak of here in Iceland nor that people from that company have any knowledge of this market. I ask: Why are they issuing a report on Iceland? I don't quite get it. Why are people who have never conducted a single interview in Iceland issuing reports on [on Iceland]."

Capital flows to a country that had been the darling of the capital markets (at least a few hedge funds and prop desks) suddenly dry up.

It does have a familiar ring.  At least if you remember Asia's crisis.

Will Iceland experience a sharp recession or just slow down a bit?