Would savers be better off if the banks they invested their money in collapsed, or if pensioners saw the government cut their pensions because it could no longer pay them? When a small country sees a big sector in their economy collapse like Iceland and their banking sector, there's going to be pain no matter which way you slice it. What the route Iceland has chosen does is spread the pain evenly between retirees who see their savings lose value and workers who see their paychecks love value. And you avoid the mass unemployment you tend to get through other methods, which further decreases the size of the real economy in a sub-critical positive feedback loop.