Islands Going Bankrupt

The top news story on yahoo when I looked briefly at o'dark 30 this morning was that Iceland might have to file bankruptcy. I wasn't aware that was an option for a country (even if a $700 billion bailout is). When you think of international banks on islands, Grand Cayman is more likely to come to mind. I don't read a lot of financial news, but it seems like all the recent financial crises worldwide are coming as a shock to most of the population (although a subsistence farmer in rural Africa may not care at this point in time). Why?