The first tax haven needs bailing out. Who’s going to save Iceland?

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The BBC has reported that:

Share trading in six of Iceland's biggest financial firms has been halted temporarily, the country's stock exchange has said. The includes the country's three biggest three banks, Kaupthing, Landsbanki and Glitnir. Iceland's government said it was drafting a plan to deal with the country's financial crisis. Banks now dwarf the rest of the economy, leaving Iceland heavily exposed to the global credit squeeze.

The country's largest banks have now agreed to sell off some of their foreign assets and bring them home, to help bolster the banking sector. This money will be brought back into Iceland, in an effort to shore up the economy and prevent the currency, the krona, from sliding any further. Last week, it lost a fifth of its value against the dollar. The government is now trying to persuade the trade union pension funds to repatriate some of their funds too. But in return, the unions want Iceland to apply for EU membership - a move it has resisted for decades.

Analysts have warned the troubled banking sector may be too big for Iceland to be able to save.

The sting is in the tail. The Icelandic economy is going to fail, as is its currency.

This will be the first country brought to its knees by the credit crisis. It won't be the last. We need to work out two things: the first is how to bail out tax havens, and on what terms. The second is how to bail out other countries.

Iceland is firmly in the first category. But this crisis is far too big to think it will stay in places as small as it is. The action has to begin now.