That's a large part of it. Spain can't devalue it's currency easily, or get rid of their debt. Europe won't let them default and stay in.

They'd basically have to leave the Euro to do what Iceland did. And that would be complicated.

What's happening now is actually more complicated. The economies of the south are never going to take off with measures that are planned by a committee of 3 world institutions. The more the south sticks to the euro, the more complicated it's going to get. There is a good chance that a 'southern euro' might actually work, as the southern economies are all in similarly bad shape and in need of stimulus.

10 points!

Iceland is also a lot smaller than Spain.

Pretty much. Iceland is about the same size as Stockton, CA, which is currently in Chapter 9 (IIRC). Iceland isn't all that much more important than a smallish US city.

I'd purposely avoid drawing any lessons from Iceland. We have the world's smallest independent currency and devaluation cut our purchasing power in half.