Shoppers brave the driving sleet to buy Christmas gifts in Reykjavik. The collapse of the Icelandic krona has pushed up the price of imported goods, and inflation is running at 18 per cent. Shops stay open until 10pm, but many of the designer boutiques are empty.

An angel decoration hangs in the window of a Reykjavik jewellery shop. Diamonds and other luxury goods became wildly popular in recent years as Iceland’s economy boomed, but the shopkeepers face an uncertain future as recession sets in.

Traditional Icelandic businesses are suffering too. This outdoor gear shop has to sell goods at a discount, even though they cost more to import because of the weak krona. Profit margins are between 20 and 40 per lower than they need to be.

Its manager, Halldór Hreinsson, is stoical. He stands in front of a poster of his grandchild. “When I look into the mirror, I smile because I am alive, I have family, I have food and shelter.”

His British employee, 60-year old Paul O’Keeffe, moved to Iceland 35 years ago. He says the crisis has plunged Iceland back in time. “We’re still free-falling, we don’t know where the bottom is.”

Mr O’Keefe poses with a picture he has painted of a derelict Icelandic house, entitled: “The country is bleeding.”

One of Reykjavik’s half-built suburbs; most are unlikely to be finished now that credit has dried up.

Church attendance has risen since the crisis. Christmas services at Hallgrimskirkja, which towers over Reykjavik, have been packed out.

Jon Omar Gunnarsson, a youth pastor, was ordained the day before the crisis hit in October. “The banking system grew so fast it left the church and the values of the past behind. Now I think people are going back to traditional values.”

Jönina Bjôrk Sveinsdottir sells hot coffee at a Christmas market to raise funds for families who are struggling. Some people have donated pre-wrapped presents for children whose parents have lost their jobs.

Church Aid, the Reykjavik branch of the Icelandic Red Cross, and Mothers’ Aid have collaborated to set up a temporary food distribution centre in an office building. They run it every year, but the number of applications has risen 30 per cent this Christmas.

Gallows humour abounds. One café asks tourists to swap their foreign currency for a single Icelandic krona (worth 0.005p) so the country can begin repaying its debts. “12 per cent of the income of this project goes to her Majesty’s Treasury of the United Kingdom.”