15 March 2012 Last updated at 11:39 ET

Iceland profile

A sparsely-populated North Atlantic island, Iceland is famous for its hot springs, geysers and active volcanoes. Lava fields cover much of the land and hot water is pumped from under the ground to supply much of the country's heating.

Iceland became an independent republic in 1944 and went on to become one of the world's most prosperous economies. However, the collapse of the banking system in 2008 exposed that prosperity as having been built on a dangerously vulnerable economic model.

In recent years Iceland enjoyed a standard of living that was among the highest in the world. Its prosperity initially rested on the fishing industry, but with the gradual contraction of this sector the Icelandic economy developed into new areas.

By the beginning of the 21st century, Iceland had come to epitomise the global credit boom. Its banks expanded dramatically overseas and foreign money poured into the country, fuelling exceptional growth.

Before the global credit crunch took hold, Icelandic banks had foreign assets worth about 10 times the country's GDP, with debts to match, and Icelandic businesses also made major investments abroad.

The global financial crisis of 2008 exposed the Icelandic economy's dependence on the banking sector, leaving it particularly vulnerable to collapse.

In October 2008, the government took over control of all three of the country's major banks in an effort to stabilise the financial system. Shortly after this, Iceland became the first western country to apply to the International Monetary Fund (IMF) for emergency financial aid since 1976.

The economy shrank by 6.8% in 2009, though by the end of 2010 there were some signs of an improvement, with the first growth recorded for two years.

Environmental issues

In the long term, Iceland's well educated workforce and its extensive and as yet largely untapped natural resources are likely to provide the key to its recovery from the economic crisis, though concerns have been raised over the potential environmental impact of developing the latter.

Environmentalists have protested that a major aluminium smelter project and associated geothermal and hydroelectric schemes were being pushed through at the expense of fragile wildlife habitats.

The country has extended its territorial waters several times since the end of the 1950s to protect its fishermen and their main catch of Atlantic cod from foreign fleets.

Traditionally a whaling nation, Iceland abandoned the practice in 1989 in line with an international moratorium. It later resumed scientific whaling, intended to investigate the impact of whales on fish stocks, and in 2006 it announced a return to commercial hunts. The move was condemned by environmental groups.

Although it has no armed forces, Iceland is a member of Nato, and US troops were stationed in the country from World War II until 2006. In 1985 Iceland declared itself a nuclear-free zone.

Relations with Europe

Icelanders have for a long time been resistant to the idea of joining the European Union, though the country is a member of the Schengen border-free travel zone and the European Free Trade Association (EFTA).

Attitudes towards the EU slowly softened, and in July 2009 the country formally applied for EU accession.

The government hopes that the path to EU membership will be completed by 2012, but there are a number of obstacles that could disrupt this timetable.

Chief among them is a debt dispute with Britain and the Netherlands arising from the 2008 collapse of the Icelandic banking sector, which hit British and Dutch investors hard. However, efforts to resolve this appeared to be making some headway by the end of 2010.

The debt issue has in its turn led many Icelanders to question whether EU membership is such a good idea after all, and an opinion poll conducted shortly before formal accession talks began in July 2010 showed that a majority was in favour of withdrawing the country's application.

Other areas that have the capacity to derail the negotiations are Iceland's whale hunting industry and its insistence on maintaining its fishing limits - an issue that precipitated the "Cod Wars" of the 1950s and 1970s.

Iceland's announcement that it was unilaterally increasing its mackeral fishing quota for 2011 by nearly 17,000 tonnes looked set to increase tensions with the EU and Norway.