First of all, for whatever reason Iceland let it banks default, it was the right thing to do. And Ireland should have done the same.
Second, is it so hard to believe that "free market fundamentalist" thinks banks should be allowed to default? After all, "Let fall what cannot stand" is a normal free market attitude.
Thridly, free market people rarely claim that the market is all-knowing and infallible. They just claim that the market is better than the alternatives. When, I believe, Milton Friedman said "capatalism is a profit and loss system", he also recognizes, like most other "free market fundamentalist", that capitalism is not perfect. If you want to look for utopia, you need to go to the other side of the political spectrum.