Nowhere in the world can the impact of the credit crunch be more clearly seen than in Iceland, a nation on the brink of financial implosion. As the events of the last week unravel, Iceland has found itself struggling to avert the alarming possibility that the financial meltdown could spread to the "real" economy and Iceland's food industry now has to face a crisis not of its own making. Katy Humphries reports.

Last week, Iceland's three largest banks - Kaupthing, Glitnir and Landsbanki - collapsed under the weight of debts incurred by heavy lending, putting more than EUR20bn (US$27bn) of depositors' money in jeopardy across Europe.

Iceland's government has responded by enacting emergency measures designed to "protect the Icelandic nation and ensure the national banking system could continue to function normally" and "to avoid, in the worst case, becoming sucked into a whirlpool that could lead to national bankruptcy".

The banks have been nationalised and the Icelandic Financial Regulator (IFR) has been granted unlimited powers over all Icelandic financial institutions. These powers include the ability to appoint directors, the right to call shareholders' meetings without notice, the right to merge, the right to acquire and the right to liquidate.

A week on, and Iceland's Prime Minister Geir Haarde warns of further catastrophe. "The danger is real that the Icelandic economy would be sucked, along with banks, under the waves and the nation would become bankrupt," he cautions.

Icelandic food companies are already feeling the negative impact of the financial markets' collapse.

Due to the nature of Iceland's volcanic terrain, its food industry only produces significant quantities of meat, fish and dairy products. The country relies heavily on imports for a majority of foods. 

However, food companies and retailers are finding it increasingly difficult to import goods, raising the spectre of potential food shortages.

Despite the government's reassurances that it has enough foreign currency reserves to import food and other essentials for eight months, shoppers are bulk-buying long-life products while stocks last. 

A spokesperson for the Baugur-owned supermarket group Bonus tells just-food that food sales have "almost doubled" in the past week.

While the supermarket operator declines to comment on stock levels or the possibility that food imports could decrease, the spokesperson acknowledges: "people are stocking up on essentials."

As food becomes more scarce, prices are being driven up by the dramatic weakening of the Icelandic kronur, which has lost more than 40% of its value since the beginning of the year.

This decline means that it is becoming more expensive to import food products, the general manager of the Icelandic Federation of Trade and Services tells just-food.

"We import a lot of food and because of the devaluation of the Icelandic kronur the price of food in Iceland will rise steeply. But hopefully the kronur will get stronger in the next few weeks. Its current value is ridiculous."

Inflation is currently running at 15%, but the kronur's freefall has led some to predict that inflation could be as high as 20% by the end of the year.

The devaluation of the kronur is also prompting suppliers to demand payment in other currencies. This is proving problematic because Icelandic food companies' access to foreign currency has been limited by the collapse of the banks.

"The financial crisis is extremely severe. Access to foreign currency is limited and this is causing food importers considerable problems," Sigurdur Sigurdsson, chairman of dry groceries and produce importer Búr, tells just-food.

Sigurdsson says that while Búr is currently able to pay its foreign suppliers, if the situation persists and the company finds itself unable to access foreign currency, then its ability to do so may be impaired. This problem, Sigurdsson says, is industry wide.

"If this situation continues food companies' ability to import food could become an issue," Sigurdsson warns.

Nevertheless, Sigurdsson sees a light on the horizon. "The situation with the banks is being sorted out, so we are told. The country, apart from this tragic crisis, is sound. Our core industries - aluminium and fishing - are strong. We are optimistic that things will be sorted out in the next few days."

Another issue plaguing Iceland's food sector and threatening the availability of food imports is the withdrawal of credit insurance for suppliers. 

International food and ingredient companies selling goods to Icelandic businesses routinely take out credit insurance to protect against non-payment. However, with credit insurance companies coming to view Icelandic businesses as high risk, they are less willing to increase their exposure to the market and are therefore reluctant to offer credit insurance.

According to seafood company the Icelandic Group, suppliers who are unable to get credit insurance are beginning to demand payment in advance, meaning that overseas credit has dried up. Although the Icelandic Group exports value-added seafood, without supplies from abroad it would be unable to process products.

"Credit insurance groups are looking at companies from Iceland as more risky. If suppliers can't get credit insurance they require payment in advance. This ties up our cash flow more quickly and can be problematic," a spokesperson for the group tells just-food.

With all the major banks now under state control and the sale of overseas assets already underway, there is a hope in Iceland that things will return to normal in a matter of days.

This optimism has been bolstered by the news that meetings will be held in Moscow this week to secure a EUR400bn loan, while the Bank of England has agreed a GBP100m (US$175m) loan to ensure the short-term operation of Landsbanki.

However, Dena Kerns, the director of insurance broker Credit Insurance Alliance, paints a far gloomier picture.

"The view is that whilst the banks get themselves together there is going to be an increase in insolvencies," Kerns tells just-food. "The situation in Iceland is going to get worse on the corporate side before it gets better and you will be left with a core of strong companies."

According to Kerns, this outlook means that insurance companies are likely to steer well clear of the Icelandic market in the near future.

"It won't be until financially strong international players look to cherry pick Icelandic businesses that insurers will be prepared to increase their exposure to the market, and even then they may require additional security," she predicts.

Until this time, Iceland is likely to remain an economic pariah.

Without access to credit insurance, overseas food companies are going to be less willing to export products to Iceland on credit. And without access to foreign capital, even Icelandic companies with a strong balance sheet will struggle to import goods. 

While it is too early to say what the final cost of the credit crunch will be for Iceland's food industry, the early signs seem bleak and it is rapidly becoming clear that no one is immune to the financial turmoil at the centre of the credit crisis.