We conclude that Iceland on almost all measures looks worse than Thailand did before its crisis in 1997 and only moderately more healthy than Turkey before its 2001-crisis.
We see a substantial risk of a financial crisis as an integral part of an Icelandic 2006-2007 recession. The funding squeeze of the banks will probably force them to reduce lending to domestic players, and force a sell off of external assets.
Icelandic banks have effectively been shut out of global credit markets, and a credit crisis is just around the corner.