In the heart of downtown Reykjavik sits a freshly painted pink building. The innards of the two-story metal structure have been gutted to make way for smooth concrete floors, diamond white walls and racks of clothing from Icelandic retailer, Nikita. Just a year ago, the same building was being readied for demolition. In its place were plans for an ultramodern shopping mall stretching several blocks across the capital's commercial district. Then came the crash.

The collapse of three Icelandic banks in October 2008 meant cranes across the country came to a halt. A broken economy has led to rock-bottom rents. And while the new lows may have hit local landlords hard, it enabled a kind of tenant once prohibited from the high-traffic destination to move in — emerging fashion designers. "Creativity doesn't stop when the money goes," says Runar Omarsson, co-owner of Nikita, a street-wear line that caters mainly to skate- and snowboarders. "It is important to look at what we have and make something out of it. There are valuable things here, and we hope to get attention for our creations."

But many of these young designers are getting more than just attention. "The crash has affected us in a really good way," says Bara Holmgeirsdottir, owner of nearby store Aftur. Her long, sweeping, blond hair brushes the top of her cutting table as she molds a piece of fabric into a dress. "No one is traveling abroad, so you have to shop locally. We have actually doubled our sales."

Aftur's bottom line isn't unique. Down the street the three-month-old Fabelhaft shop has also logged surprisingly high sales. "Opening now has been the best investment for us," says co-owner Dusa Olafsdottir. Inside, tourists and natives mill around bespoke hats and dresses in the boutique's bleached white cube. "Before the crash it was ridiculously expensive on this street, but now you can have your own label and store."

Instead of pressure, students in the graduating class of the country's Academy of Fine Arts fashion school feel utterly liberated about entering the job market after the crash. "Before it was 'What are you thinking going into design?' " says Rakel Solros as she put the finishing touches on her homework for the week — a jet black evening dress. "It may be harder to get the loan now, but everyone is prepared to do much more and make something real happen."

The string of success stories has transformed a design scene once considered frivolous — back when banking was choice — into one of the few sectors driving Iceland out of its economic quagmire. In September, the Ministry of Industry bestowed its first million-dollar grant to a fashion house, Andersen & Lauth. The company's creative director, Gunnar Hilmarsson, was also recently crowned chairman of the year-and-a-half-old Design Centre. Although it was created before the crash, Hilmarsson explains that the center — which is a government-sponsored platform for exhibitions and seminars — took on a new life once the money disappeared. "People are looking into how we can survive in the future," says Hilmarsson. "Design and fashion have now become a high focus, not only within the sector, but also politically." Indeed, in May of this year, the promotion of design both at home and abroad was incorporated into the agenda of Iceland's new Social Democratic Alliance and the Left-Green Movement coalition government.

The promise of Icelandic design even lured Israel-born Sruli Recht to open a store on the outskirts of Reykjavik in a neighborhood locals call the fishpacking district. Just two months old, the 135-sq-m boutique cum design studio sells wallets made out of discarded Nile perch skin and Minke whale — commercial whaling is both popular and legal here — and floor-length sweaters. "Everyone was looking at what happened here as a catastrophe, but I see it as an opportunity," says Recht as he toys with a mannequin wrapped in mounds of black knitted Icelandic wool. A gust of wind from the nearby rocky shore taps on his glass door. "When you have nothing, why not risk everything?"