The country's three main banks failed and the government urgently nationalised them. Iceland became the first western European country in 25 years to ask the International Monetary Fund for a bailout, and top finance executives went to jail.
Iceland returned to annual growth in 2011. Its economy grew by 7.2 percent in 2016, the highest among the OECD countries, fuelled by private consumption, soaring tourism and an expansive fiscal policy.
As Iceland votes for a second time in a year, here is a list of key dates on the country's fall and rise from the ashes.
2008
September: The global financial crisis hits Iceland, where the banking sector represented two thirds of the value of the Reykjavik stock exchange.
October: The state lets the three largest banks fail before nationalising them. Iceland freezes foreign assets, preventing British and Dutch creditors from recovering their money. Thousands of Icelanders take to the streets, banging pots and pans in protest against the centre-right government.
2009
January: Iceland's "pots and pans" revolution forces the right-wing government to resign.
February: Iceland elects Social Democrat leader Johanna Sigurdardottir as prime minister. She is the first openly lesbian leader in the West.
April: The centre-left government undertakes reforms. A "crowd-sourced" constitution drafted by 25 ordinary citizens is submitted to parliament on July 11. It has yet to be ratified by parliament.
2010
April: The Eyjafjoll volcano, located under the Eyjafjallajokull glacier, spews a cloud of ash that rises 9,000 metres (30,000 feet). It wreaks havoc in European skies, leaving more than 100,000 flights cancelled and eight million passengers stranded.
2011
Iceland returns to annual growth after years of hardship that drove thousands of its citizens abroad, including many young people, in the country's largest wave of emigration since the late 19th century.
2013
April: The anti-establishment Pirate Party, with roots in libertarian movements in Sweden and Germany, enters the Icelandic parliament, the Althingi, for the first time with three seats. The right, which was ousted in 2009 protests, reclaims power.
2015
October: The IMF announces that Iceland has fully repaid its loans.
2016
January: Iceland announces it has fully reimbursed Britain after the collapse of the online Icesave bank in 2008, which had left British and Dutch account-holders empty-handed.
April: The Panama Papers reveal that Prime Minister Sigmundur David Gunnlaugsson and his wife held millions of dollars in an offshore account in the British Virgin Islands. Gunnlaugsson resigns and is replaced by Sigurdur Johannsson who promises early elections before the end of the year.
June: Gudni Johannesson, a history professor, is elected president, a largely ceremonial role, succeeding Olafur Ragnar Grimsson, who decides not to run for re-election after his wife's name appears in the Panama Papers.
July: For the first time in its history, football minnow Iceland reaches the Euro 2016 quarter finals but is beaten by France (5-2).
October: Iceland holds a snap election that sees the Pirate Party gain momentum, but the conservative Independence Party wins the most votes and forms a coalition after several months of negotiations.
2017
January: Former finance minister Bjarni Benediktsson, whose name appeared in the Panama Papers, becomes prime minister.
September: Reports emerge accusing Benediktsson of covering up his father's recommendation letter for a convicted paedophile to help him "restore his honour". He resigns and calls for a snap election to be held on October 28.
October: Iceland becomes the smallest ever nation to qualify for the 2018 World Cup finals in Russia.
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![The 10 warmest years have occurred since 2007 [Black Doctor]](data:image/svg+xml;charset=utf8,%3Csvg%20xmlns%3D'http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg'%20width%3D'300'%20height%3D'172'%20data-ring-placeholder%3D'1'%3E%3C%2Fsvg%3E "The 10 warmest years have occurred since 2007 [Black Doctor]")
