Icelanders are suffering in the aftermath of the catastrophic collapse of their country's economy

A year on from a ruinous banking crash, there are surprisingly few visible signs of the desperate financial straits in which Iceland's 315,000 inhabitants find themselves.

Designer fashion shops, bars and restaurants on Laugavegur, the main shopping street in Reykjavik, continue to trade – as do the city centre's boutique hotels. And not all customers are tourists taking advantage of the devalued krona.

On the harbourside, next to the plush central bank offices, construction of a glass-plated national concert hall, started several years ago, nears completion. Meanwhile a new reformist coalition government is optimistically talking about restoring Nordic egalitarian priorities within a strong welfare state.

It hardly seems the typical recipient of a $10bn (£6.2bn) package of bailout loans orchestrated by the IMF.

But, despite the outward signs of continued prosperity, most Icelanders are quietly waking up to the burdensome legacy they must endure after one of the most rapid destructions of wealth any economy has ever seen.

It was on 30 September last year that the Icelandic government seized control of the country's big three banks following a run on their deposits.

Finance minister Steingrimur Sigfusson, a leftwinger who spent years warning of the need to rein in the banks, sums it up: "At the end of every good party there is a bill that has to be paid."

IMF officials appear to have allowed the country some breathing space, but the full pain of its stringent loan conditions will be felt in a second round of heavy tax rises and public spending cuts next year.

The government expects Iceland's domestic production to shrink by 9% this year, falling a further 1 or 2% in 2010. Unemployment is likely to grow to one in 10 of the workforce this winter while many more have had to take big pay cuts.

Health minister Ogmundur Jonasson said his department's budget had been cut by 7% this year and would face similar reductions in 2010. Furious at enforced cuts across the welfare state, he accused the IMF of acting only in the interest of international creditors.

"As a leftwing politician, when it comes to prioritising the rights of property owners or those who own nothing, I tend to side with the latter group... People are really ashamed of what we did, but do you make cuts at a cancer ward in Reykjavik to honour those international debts? Would you rather lose £10,000 in a bank deposit or see a bed removed from your mother's care home?"

Meanwhile Sigfusson believes between 15% and 20% of households are in "severe trouble" with their loans and will need some form of assistance. A similar debt crisis faces those Icelandic businesses fortunate enough to have survived the crisis.

The hardest hit are homeowners who, balking at Iceland's high interest rates, previously took out loans partly in foreign currencies. They have seen repayments soar after a run on the krona.

Anger among ordinary households has led to plans for a two-week repayment strike starting on Thursday. It has been organised by the Icelandic Home Coalition, a new grassroots movement.

Anger is in large part focused on a belief that ordinary working people, who never sought to take huge financial risks, have been forced to pick up the tab for an elite band of aggressive business tycoons, a few of whom may have been fortunate enough to salt away some of the spoils of their own recklessness before their luck turned.

Sigfusson confesses he shares some of this frustration. "It is more than easy to see people will say: 'This is not our debt. These were private banks, why should we have to pay for their mistakes.' It is the same question people are asking about the City and Wall Street.

"These banks were allowed to grow out of all proportion. A peculiar atmosphere was created. There was a total lack of self-criticism, mostly in the political and financial world, but also in the media. These politicians and ideologists ... in many ways turned Iceland into a neoliberal laboratory. And the experiment had a terrible ending."

After its bitter experience as an international financial centre, heavily indebted Iceland must now fall back on the more mundane energy, farming, tourism and fishing industries, which are its best hope of economic recovery.

A massive foreign workforce, attracted in the boom years, has almost entirely disappeared. Some young Icelanders are beginning to emigrate too. Up to 1,800 are said to have left since the crisis though almost 1,200 have returned — many of them no longer able to finance living abroad.

While passions run high over who is to blame, Sigfusson insists his role is to prepare the country for the future. The government is considering an application to join the European Union and he has been working to resurrect a stable domestic banking system as well as tackling difficult negotiations over bailout loans from the IMF and others.

"I look at this as a temporary situation we have to get out of. The long-term prospects are bright, very bright."

There is little point squabbling over who blame, he suggests, noting a government-appointed "truth commission" is shortly to deliver an official narrative of the collapse.

Pall Hreinsson, the supreme court judge who chairs the commission, this month said: "No committee has ever had to bring to its nation such bad news."

His chilling words have sparked intense speculation about the commission's likely findings, but he refuses to elaborate. "Those words were needed so that people will expect what is coming from us," he told the Guardian. "It is paramount that we understand. So that we can change the things we need to, and live with what we have to live with."

His report will be published in November but will not delve into contentious details of specific deals involving Iceland's failed banks and investment companies.

Where criminal activity is suspected, evidence has been passed to a team of fraud investigators advised by veteran French magistrate and anti-fraud crusader Eva Joly.

Team leader Olafur Hauksson has already taken on more than 35 cases and he believes the commission's findings will contain yet more important evidence. "We are most certain we will have much more information in this report that will lead to matters [coming to us] that have not been brought up yet."

As well as addressing shortcomings in the commercial world, the commission's report is expected to attack the Icelandic authorities – government, the central bank and the financial regulator.

These bodies have already been partially blamed by many for failing to act to protect the economy from a vicious stockmarket and credit bubble and a dangerously outsized banking sector.

Iceland's three major banks, the engines of its rapid growth – Kaupthing, Glitnir and Landsbanki – had combined assets valued at almost 10 times Iceland's GDP prior to the crisis.

Now all in bankruptcy protection, likely losses have yet to be assessed but some experts suggest they will reach $90bn (£56bn) across the three firms.

Exactly how big the losses left behind by Iceland's failed banks and investment companies turn out to be will depend on what value can be extracted from remaining assets now being overseen by insolvency experts on behalf of creditors. The ownership of many well-known British retail chains including Hamleys, Iceland and House of Fraser – as well as Premiership football club West Ham – hangs in the balance.

Hreinsson says his report will address the big three banks' perilous exposure to a few companies and individuals – many of whom enjoyed an international reputation in recent years as Iceland's "business vikings", expanding aggressively overseas.

The truth commission is examining how and why more than half the value of loans advanced by the three banks were to just 100 concerns.

Focus on this issue has been heightened in recent weeks by the leaking of internal papers on major loans at Kaupthing. The papers detail huge bets Iceland's largest bank was taking on its closest clients, many of whom held a substantial interest in the bank's own shares and several of whom had been allowed to post shares as security for multimillion pound loans.

Some former Icelandic bankers believe allegations of widespread fraud and corruption are grossly overstated.

Even criminal prosecutor Hauksson agrees: "It is too much to say the whole collapse was brought on by criminal affairs … It was an extreme situation combined with some wrongdoing."

Most experts agree a forensic tracing of Iceland's tangled money trail, complicated by multiple cross-holdings and share-backed lending, is likely to turn in on itself.

Much of the nation's vast wealth has vaporised in plunging stockmarkets and defaults on poorly collateralised loans. If there are funds illegally hidden in Caribbean tax havens, they will amount to small change next to the debt mountain Iceland now faces.