In the build-up to the global crisis of 2008, tiny Iceland was a canary in the mine, a leading indicator of wider vulnerabilities. Now, amid growing optimism about global recovery, Iceland may again be a leading indicator of trouble ahead.

In the space of a few days last October Iceland's whole banking system collapsed and was taken into public ownership, including the three banks which went from nowhere in 2002 to rank among the world's 300 biggest by 2007. These three now make it into a less glorious league – Moody's list of the 11 biggest financial bankruptcies in history. The country's average income fell from 160 per cent of the US's in 2007 to 80 per cent this year.

Yet, walking around Reykjavik and other cities this summer, one sees no signs of economic distress. The country looks amazingly prosperous. Traffic density has fallen a little, but only to 2005 levels. Unemployment has risen to 8 to 9 per cent, nearly twice the previous postwar record – but is still below that of several other high-income countries. Applications for free food from charities have increased, but numbers remain small. Four out of five households have been affected only at the margins.