Iceland may be famous for geothermal energy, but its economy sure isn't looking too hot these days.

The Nordic country has nationalized its second- and third-largest banks within the past week, and is trying to secure funding to save the nation from bankruptcy. The country's currency has lost 30% of its value this year alone, and its inflation rate is running at 14.5%.

The country’s prime minister, Geir H. Haarde, painted an even more dire picture.

“There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy,” Haarde said in a Monday address to the country.

Iceland's sad economic story stems from the global credit crunch that has consumed many banks and economies from around the world.

Analysts said that the problems caused by the global credit crunch, where banks overleveraged themselves and invested in toxic assets, were made exponentially worse in Iceland, where 85% of its 300,000-person population live in the country’s capital Reykjavik.

"The problems in the U.S. and the problems in Europe are the same in Iceland," said Eileen Zhang, a sovereign credit analyst with Standard & Poor’s. "Just a lot worse" in Iceland.

Iceland’s problems originated when during a four-year boom period when a flood of foreign money moved into the country. The country’s gross national product grew at a stunning 7.7% in 2004, 7.4% in 2005, 4.4% in 2006 and 4.9% in 2007, according to Fitch. The unemployment rate for the country hit an astonishingly low 1.1% in 2007.

Because of the inflow of cash and the good economy, the three major banks -- Landsbanki, Glitnir and Kaupthing -- invested heavily outside the country, analysts said.

“The banks used the same funding model that Lehman Brothers and Bear Stearns used,” said Mark Williams, a finance professor at Boston University. “They used short term financing to expand and make long term investments -- primarily in Europe and North America."

The country’s trade deficit, fueled by excessive consumer and government spending, grew to 25% of the country’s GDP in 2006 at its height. The U.S. trade deficit, often cited as exceptionally large, is around 2% of the U.S.’s GDP.

It got to the point that those banks held assets worth nine times the amount than the entire GDP of the country.

In comparison, the U.S.’s financial rescue package, which is expected to cost around $700 billion, only covers about 5% of the U.S.’s banks total assets.

“Iceland’s banks had extremely high external leverage,” Zhang said. “They were creating a lot of wealth in Iceland, but when the global environment went sour; the banks tried to refinance their assets and just were unable to.”

The country is now trying to hemorrhage a collapsing stock market and banking system. The Icelandic government announced Monday it would loan $680 million to Kaupthing, the country’s last remaining big bank, and would guarantee 100% of deposits in savings accounts.

Now the three major credit agencies -- S&P, Moody's and Fitch -- have all downgraded Iceland's debt, often several steps, on concerns Iceland could default.

“It’s been not just a run on the bank, it’s been a run on the country,” Williams said.

A reflection of how dire it might be for Iceland, the government is attempting to secure a loan from Russia for $5.3 billion to keep the country from defaulting on its debt.

While Iceland is small, it's an important part of the world economy. The country produces large amounts of hydroelectric and geothermal energy. More importantly, because the banks did invest abroad, Icelandic banks hold considerable investments in North America, Europe and Asia that could be at risk if Iceland collapses.

“The Icelandic people are very bright, but they realize they don’t have anything to export,” Williams said. “They had to export their intellectual capacity -- which came primarily through investing abroad.”