In the wake of Iceland’s economic collapse, Reykjavík-based designer Steinunn Sigurðardóttir said her country may be facing is greatest challenge.

This story first appeared in the November 26, 2008 issue of WWD. Subscribe Today.

“It feels like an earthquake and we just keep getting the aftershocks,” said Sigurðardóttir, who designs intricate knitted ready-to-wear inspired by Iceland’s nature. Last year she won the Swedish Soderberg Prize, one of the world’s major design prizes.

“We are so used to having things we want,” she said. “Now we have to be more creative about how we go about things.”

Iceland’s banking system was caught up in the global financial crisis, and international trading of the krona, the country’s currency, is at a standstill. The government has taken out $4.6 billion in loans from the International Monetary Fund and four Nordic countries. In addition, Iceland had to take over three of its largest banks. The value of the krona has been sliced in half in the past year. Protesters have taken to the streets to decry the government’s handling of the crisis.

As part of its rescue plan, the government halted imports, and once they are reinstated, the expense of doing business will be substantially higher because of the devaluation of the currency. “In January, the dollar was worth 64 kronor. In August, it increased to 82 kronor, and as of Monday it stood at 137.5 kronor. So anything I will import once the currency markets will reopen will cost double,” Sigurðardóttir said.

Government officials expect the krona to reach to 160 or 180 before it bounces back, she said. Prices of everyday items like bread and milk are up 15 percent.

What really rankled her and fellow business owners, however, was Britain using its 2001 antiterrorism laws to freeze the British assets of a failing Icelandic bank. “Policemen in Iceland don’t even carry guns. There is no army here — no nothing. I do not own a weapon. I am not a terrorist,” she said.

Residents are using the krona as much as they can to try to prop up the economy. “Everyone here is basically saying, ‘We need to support what’s happening in this country.’ We’re buying Icelandic food,” she said.

“There are talks for store owners, designers and heads of companies. Everyone is trying to work out what we can do by putting our hands together to work this out. We’re also trying to get manufacturers to start working with designers, but not only clothing designers.”

Sigurðardóttir has canceled business trips to New York and London since the Icelandic government will only allow residents to exchange what amounts to about $500 for travel. Far smaller things consume her time now. Unable to buy Belgian shopping bags for the freestanding store she moved into a few months back, the designer bought solid black ones from a local company.

However, the weak krona has bolstered tourism, which is helping Sigurðardóttir’s business. She and other designers have been getting together at the Rösshka Museum to brainstorm. “Maybe we will have a design revolution like we had an industrial revolution 100 years ago,” Sigurðardóttir said.

Many women are knitting and sewing their own clothes to try to save money. Sigurðardóttir has pared down her fall collection to the bare minimums. “I am looking at this whole thing as a challenge. How do you go back to a certain kind of realistic value? We were so caught up with having the latest TV screens and ‘It’ bag. Now I want that bag to mean something. It has to have integrity and a story,” she said.