Few countries were hit as hard as Iceland was in the 2008 financial collapse. It is a small country of 320,000. When the collapse came in 2008, $85 billion was lost in bank defaults. Here is a summary of the situation that surrounded the 2008 economic collapse in Iceland from Money Week:

[I]n the five years to 2008, Iceland’s banks went wild, buying up huge amounts of assets. The population followed suit.

Naturally, the banks ended up going bust. But unlike bust banks almost everywhere else in the world, the Icelandic ones didn’t get bailed out. Instead, Iceland only protected domestic depositors.

This decimated the stock market and the Icelandic krona. It also made the British and Dutch angry since they had to pay off their own savers who had put money into Icelandic banks, tempted by suspiciously high interest rates.

However, it did also mean that Iceland avoided defaulting on its debt – technically at least. While inflation destroyed consumers’ purchasing power, it also meant that labour costs adjusted quickly, so unemployment remained relatively low, and growth recovered more quickly.

While the rest of the world either bailed out the banks that encouraged the collapse or imposed austerity measures on their nation’s people, Iceland took a different approach. Led by people like Hordur Torfarson, Iceland took sights at the institutions involved in making the problem instead of the people.

Once it became clear back in October 2008 that the island’s banks were beyond saving, the government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona and new state-controlled banks were created from the remnants of the lenders that failed.

Activists say the banks should go even further in their debt relief. Andrea J. Olafsdottir, chairman of the Icelandic Homes Coalition, said she doubts the numbers provided by the banks are reliable.

“There are indications that some of the financial institutions in question haven’t lost a penny with the measures that they’ve undertaken,” she said.

Iceland’s economic growth rate is now bumping along at 2.4%. That is nothing to jump up and down about, but it is better than what is happening in Europe and even the United States.

Perhaps Iceland’s approach can only work in a small, homogenous country. However, until it is tried elsewhere no one will know. The current efforts around the world may have stopped the free fall that started in 2008, but the recovery is anemic. Until the Iceland approach is tried elsewhere, no one will know if it is only an Icelandic solution or a world one.