When your .gov is bankrupt and its currency is worthless, how would "social welfare nets" help? I'm honestly confused by this statement.
If the .gov fiat money still has enough "faith and credit"
internally, things can keep on moving.
It's where that currency, having no, or greatly diminished value, meets the international market for things that can't be produced domestically/internally, that things get dicey.
Say going to the doctor costs 150ISK (Icelandic Krona). If the doctor accepts the 150ISK from you, or the socialist .gov on your behalf, and then that 150ISK will still buy some semblance of sufficient groceries for that doctor and his family at an Icelandic grocery store, things will more or less be okay in the internal micro-economy.
When that 150ISK is worthless to buy imported oil from UK north sea platforms, which is needed to get the doctor from his house to the clinic in his car, or the grocery truck from Icelandic farms (assuming there are any, and that food isn't imported..) to the store, or buy drugs, and medical supplies for the clinic that aren't produced in Iceland... then you start to run into trouble.
However, if the Icelandic .gov has some sort of hard currency reserves from some other nation's issuing bank that still has respected value, they might be able to fudge the necessities.
Or they don't, and stuff starts going Tango-Uniform.