August 12, 2013: 7:05 AM ET

Another Icelandic meltdown may be coming. That would reignite investor fear, leading to yet another panic on the continent.

By Cyrus Sanati

Something explodes in Iceland.

Something explodes in Iceland.

FORTUNE — The inevitable unmasking of Iceland’s dubious economic recovery could have severe consequences for the rest of Europe. Since 2008, the small island nation has been able to avoid an all-out economic meltdown thanks largely to government-imposed capital controls that have kept its currency from imploding. At the same time, the nation’s zombie banks have managed to avoid total collapse thanks to delay tactics that have allowed them to avoid settling with their creditors.

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