It was all over the news (including here!) not so long ago. Gordon Brown protrayed it as an act of terrorism in order to freeze the Icelandic assets that remained within UK jurisdiction. People there were storming the parliament in protest (not so dissimilarly to the people in Greece protesting now actually).
However, you don't hear anything about it now. Life is slowly returning to normal there, based on the little that we do hear. (Aside from that small matter of the inconvenient volcano of course.)
The thing that happened is the people of Iceland rose up and said NO to the bankers and their bailouts, so the Icelandic government has defaulted on its external liabilities. And that was pretty much the end of the matter! Before it happened, you would be told that this defaulting on obligations spelled total and final, catastrophic economic ruination for the entire country, and it should be avoided by any means possible.
Amazing how these financial disasters have a habit of blowing over and it turns out life does continue after all. Perhaps we should stop worrying so much about all those unpayable national debts we've racked up in the UK after all. Perhaps deficits really don't matter... we can just blow a raspberry at the creditors, like the Icelanders, Argentinians, Russians, and all the others before us.