"Get away from me you damn greedy banker," a man in his 40s muttered angrily at a young man as they passed each other in downtown Reykjavik last Tuesday. The older man was dressed in a parka, the other a business suit. Ironically, the street where the two met is called Bankastraeti, which translates from Icelandic into 'Bank Street'. A short stretch of road, it runs down a hill connecting the Icelandic capital's centre plaza and its main shopping street.

The past few days have seen a number of incidents of people venting their anger and frustration at passers by whom they suspect of being bank officials. Even Iceland's prime minister, Geir Haarde, got an earful at the gym he frequents and now has two bodyguards that follow him everywhere.

You can't really blame Icelanders for being angry. Just over a week ago they were proud of their financial institutions. The country's biggest banks had successfully extended their reach into foreign countries, having been privatised only a few years ago. They had not put money into toxic sub-prime securities. People knew that, because of the credit crunch, it was harder to find short-term financing, but no one was really all that worried. The Icelandic banks were going to pull through. They were testament to a hard-working, ambitious and ingenious nation.

It therefore came as a complete shock last Monday when it was announced that Glitnir, the country's third-largest bank, had run into short-term financing problems and that the government was "stepping in". Apparently the situation had changed for all the banks, almost overnight. Access to important loans had closed up and Landsbanki, along with its UK IceSave Internet savings offering, tumbled.

To top it all off, the British government accused the Icelandic government of having no intention of honouring its obligations and commitments in relation to Icesave account holders. The accusation was left unanswered for a whole day resulting in a knee-jerk reaction from the British financial authorities, who decided to raid and seize the operations of the Kaupthing EDGE savings accounts. Iceland's biggest bank tumbled and fell. The damage was done.

By the end of the week Iceland's three biggest banks had been taken over by the Icelandic financial regulatory authorities. Shareholders have lost everything and more than half of bank employees in Iceland are about to lose their jobs. The unthinkable has happened and the Icelandic people are still dealing with the shock. Many fear for the future.

Perhaps Iceland was doomed to fail from the outset. The country's currency is the Icelandic krona, the smallest free-floating currency in the world. Because of the krona there have over a number of years been prevailing doubts about the Icelandic Central Bank's ability to act as a lender of last resort to the Icelandic banks. Over recent months the currency's value has fallen dramatically. Add to that international financial turmoil, bad enough to bring down huge banks on both sides of the Atlantic, and one can't help but wonder did the tiny island nation ever stand a chance?

Óli Kristján Ármannsson is Business Editor at Frettabladid, Iceland's largest daily newspaper