What is national bankruptcy?

It’s been widely reported that Iceland is on the verge of bankruptcy. I know what this would mean for an individual or a corporation - roughly, that a bankruptcy court would be put in charge of distributing the assets to creditors according to criteria set down by law, and any debt not covered by existing assets would be forgiven.

My question is: what does bankruptcy mean for a nation? Are there treaties defining it? Is there some system for overseeing the distribution of assets? Or is it just that Iceland is in danger of defaulting on its debts, and “bankruptcy” is a convenient shorthand for the news media to describe this?

Just a comment on the “convenient shorthand” issue:

I don’t know what happens when a state goes bankrupt, but if Iceland defaults on its debts, it’s indeed bankrupt, by the dictionary definition of the word.

I don’t have a full answer, but some articles about the crisis in Iceland mention that this previously happened to Argentina, so here is a link to the Wikipedia article on the Argentine economic crisis. The critical moment seems to have been when the government stopped the convertibility of the local currency to US dollars.

AFAIK, there is no concept analogous to “bankruptcy” in international law. If Iceland’s newly-nationalized banks default on their obligations to foreign creditors, I assume that those creditors can attempt to seek redress under Icelandic law. If that course of action is insufficient or if the Icelandic government cuts off that route somehow, then foreign governments may respond by freezing Icelandic assets in their own countries (as I think the UK has already done).

As a practical matter, to the extent that this is worked out at all, it will likely be through ad hoc agreements, potentially with individual nations or creditors.
Disclaimer: I am neither your lawyer nor Iceland’s.