It's melting, it's melting

Perhaps it's the laissez bastards in charge of the free markets or maybe it's the Wicked Witch of the West, but the contagious notion that lenders can lend risk-free and borrows can borrow until their cows wander off has spread like Kurt Vonnegut's Ice-9 to Iceland, with the result that its banks have been frozen while the country, like the ice caps suffering global warming, has gone into meltdown.

Iceland's financier-Vikings made their homeland trendy and wealthy - until the banking crisis left it with crippling debts

In Iceland, which has let its banks run free, the country itself could go under.

Suddenly an island with a population of 300,000, seen for the past decade as the essence of cool - a successful nation where people couldn't stop partying - is on the brink of becoming a failed state.

Since the beginning of the 20th century banks and government have worked hand in glove. If a minister slipped into Opposition, he was more or less guaranteed a post as a bank director. The privatisation of the banks was supposed to end all that, but it merely continued by other means.

Talking to the young students in Kaffibarin, one might think that Iceland is preparing for a revolution. “They should be hounded down wherever they are,” says one firebrand, “brought back from the Cayman Islands or wherever they are hiding and brought to trial.”

The business and political class are seen as traitors. Yet the anger is not simply a call for swift and sharp justice. Icelanders are returning to their sense of being islanders, rather than global players who can throw weight around in London and beyond.

Islanders, when they return to their roots, know that they have to accept geographical limitations. On some Antarctic islands there is a breed of butterfly that cannot take off - it has learnt that it is safer not to fly than to risk the storm winds. One middle-aged Icelander, asked why he didn't just leave if he was so unhappy, looked at me with unblinking eyes: “And what if I went to Denmark or wherever and got lost? Who would look for me?”

Secondly, Iceland remains a deeply Protestant country. Some of the people's anger is turned against themselves. “We went along for the ride, didn't we?” says the thirtysomething actress Sólveig Arnarsdóttir, who is dressed in a striking red seaman's coat to shield her from the Atlantic wind.

“It's right to be worried now about the people who will lose their jobs or who are bending under their debts. I've got a house that was essentially owned by the banks; now it's owned by the Government, so maybe that's not a tragedy. But we have to think again about our obsession with money.”

Iceland Turns to Russia for $5.4Bln Bailout

As Iceland teetered on the precipice of a complete financial meltdown Tuesday, the country's central bank reported that Russia was coming to its rescue with a loan of 4 billion euros ($5.4 billion).

The report turned out to be premature, as negotiations are in the early stages, but Moscow did receive an official request late Tuesday and is considering the loan, a gesture that may be motivated more by politics than economics.

"We will consider it," Finance Minister Alexei Kudrin said Tuesday, Interfax reported. "Iceland has a reputation for strict budget discipline and has a high credit rating," Kudrin said. "We're looking favorably at the request."

Jon Thorisson, CEO of VBS, an Icelandic investment bank, said a $4 billion euro loan could "help Iceland a lot," but admitted that he was surprised the source might be Russia.

"We have been calling for aid from neighboring countries and have been turned down," Thorisson said.

"This is looking like the beginning of relations between Russia and Iceland."

Britain sues Iceland over frozen savings

Britain has taken legal action against Iceland seeking to recover money belonging to British customers threatened with losing their savings in frozen Icelandic banks.

Hundreds of thousands of Britons have feared losing money in accounts left blocked by the near collapse of the island's banking system this week amid continuing turmoil on global financial markets.

There was some relief after Prime Minister Gordon Brown pledged to do whatever it took to recover money from banks including Icesave, an online British arm of Iceland's second biggest bank Landsbanki.

"We are taking legal action against the Icelandic authorities, to recover the money lost to people who deposited in UK branches of its banks," Brown told a press conference announcing a massive rescue plan for ailing British banks.

"We are showing by our actions that we stand by people who save," he added.

Guambat is growing fearful that the credit crisis will not be solved until hell freezes over.