Iceland had no ability to bail out the largest banks because their liabilities essentially dwarfed the small nation's economy.
Krugman's commentary on Spain is primarily based around the fact that Spain is shackled to the Euro. His general commentary on the entire situation is that inflicting austerity measures in the midst of an economic downtown drives down demand and worsens the downtown. This is basic economics and we have seen it play out over the past several years. It was entirely predictable and many of us said as much back in early 09.
Compare GDP growth between countries, such as the United States, that actually made some attempt at Keynesiasm and those that didn't and you won't like what you find. The United States has done quite well in terms of GDP growth compared with it's European counterparts.