In October 2008 a systemic breakdown of the Icelandic financial sector followed after the bank Lehmans Brothers went bankrupt. Over the following days a series of events lead to a dispute between the government of Iceland on one hand and the governments of the United Kingdom, Holland and Germany on the other. Iceland faced a currency crisis and resorted to extreme measures in order to avoid the economy becoming a barter economy. Actions included the guaranteeing of all deposits in Iceland. Subsequently the United Kingdom invoked anti-terror legislation and froze assets of Icelandic banks. This was done because of the Icesave deposits, which had been immensely popular in the United Kingdom. Due to the anti-terror action taken by the British and the full insurance of domestic deposits of the Icelandic a full bilateral dispute evolved. Iceland argued that it had no obligation to honour the guarantees in a systemic meltdown. The United Kingdom claimed Iceland discriminated based on nationality. The events make for an interesting perspective on political theory on one hand and economic theory on the other; realist theory and neo-liberal and mercantilist theory respectively. Iceland sought IMF assistance and immediately drew up a letter of intent. The IMF approved the letter of intent but withheld the financial assistance until Iceland accepted liability in the Icesave dispute. The thesis seeks to find out why Iceland was pressured into accepting the Icesave liabilities. The method of research is mostly desk research but two fieldtrips to Iceland were conducted as well as an insider interview and furthermore the use of informants helped the progress of the research although no argumentation was based on the information from the informants. It is argued that the United Kingdom acted out of proportion and with unforeseen consequences and coerced Iceland into accepting the liabilities through its influence in the IMF, with the support of the EU and Scandinavian countries. The liabilities are higher than Germany’s reparations, per head, for WW I. It is argued that the Icelandic government exposed its political naivety and lack of realist perspective. Furthermore the Icelandic government was susceptible to promises of quick EU accession made by British foreign ministry officials. The main result is that Iceland was the victim of circumstances as regards politics, but not as regards the economy. In order to maintain trust in the European deposit guarantee, which Iceland was a part of since it adopts EU legislation because of its EEA agreement, Iceland was forced to accept the liabilities. Otherwise trust would have evaporated in the EU’s banking system and a bank run would have started on banks that have operations disproportionate to the home economy. In response to this the EU has decided to raise deposit guarantees, which will limit the opportunities of banks from smaller economies to operate in larger economies. This infringes upon the four freedoms of the EU, a cornerstone of EU cooperation. A crisis is so serious as to demand changes. It is therefore argued that it is likely that Iceland will have quick accession to EU membership in order to alleviate the damage from accepting the Icesave deposits.