Iceland's financial rut has raised a pretty uncomfortable question for Icelanders: Can they really go it alone in the global market place or should they begin to think the unthinkable and join the European Union?

With fishing accounting for over 40% of exports, Iceland has long had reason to very firmly oppose membership in the EU. Just ask any fisherman up and down the west coast of Ireland what he thinks of the EU, and the opening of Irish waters to big Spanish tankers. Magnify his fury by 10, and you'll get a good idea of what Icelanders, a traditionally independent lot, think of the EU.

But with the economy destabilizing and the currency all over the place, support for the idea is growing. A poll published in April by the Icelandic daily Fréttabladid showed that 68% of Icelanders would be willing to open membership negotiations with the EU, up from 55% in February. EU membership would mean that the Icelandic central banks would lose the power to set interest rates. But that may well be a perfectly fair price to pay for a more stable currency.

" What we need in the long run is economic stability , which I doubt we can guarantee in the long run with our current currency," Foreign Minister Ingibjörg Sólrún Gísladóttir told the Wall Street Journal.

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The majority of durable goods, for example cars and washing machines, are imported into Iceland. So given that the currency has been taking a beating, Icelanders are now paying much more for the goods they import.

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Using the Euro would mean offering up a decent chunk of sovereignty at the EU's altar. But then, given that interest rates in Iceland are running at 15.5% and 4% in the Eurozone, membership might also offer suffering Icelanders what they really need right now.

Oct. 8 (Bloomberg) -- Iceland's central bank abandoned a peg to the euro established yesterday after it was unable to defend the price of 131 krona per euro.

The Reykjavik-based Sedlabanki said it won't defend the krona at the pegged rate for the ``time being,'' according to a statement on its Web site. Moody's Investors Service said today it lowered Iceland's government bond rating to A1 from Aa1.

``It's looking very gloomy for Iceland at the moment,'' said Bjarke Roed-Frederiksen, an economist in Copenhagen at Nordea Markets.

Local banks including Kaupthing Bank hf., the biggest lender, reported trades at 165 krona per euro after the central bank's statement today, according to Bloomberg data.

``It is clear that there is insufficient support for this exchange rate,'' the Sedlabanki said in a statement just hours after it said it would defend the krona and that the low exchange rate was ``unrealistic.''

The central bank yesterday decided to link the currency to a trade-weighted basket after it touched 350 per euro, according to Commerzbank AG in a note today.

ING Groep NV, the biggest Dutch financial-services firm, agreed today to buy more than 3 billion pounds ($5.24 billion) of retail deposits held by U.K. customers of two Icelandic banks. ING will buy 2.5 billion pounds of deposits from Kaupthing's U.K. unit and 538 million pounds from Landsbanki Islands hf's Heritable Bank, the Amsterdam-based company said.

Sedlabanki Loan

Sweden's central bank said it will loan as much as 5 billion kronor ($700 million) to the Swedish unit of Kaupthing after it was unable to meet payment obligations and was put up for sale. Luxembourg's financial regulator said it took control of the local unit of Landsbanki, which was taken over by authorities in its home country yesterday.

Iceland's government scrapped plans to nationalize Glitnir Bank hf, the country's No. 3 lender, and put the company into receivership under the control of the state regulator.

``The krona will remain under massive selling pressure,'' Antje Praefcke, a currency analyst in Frankfurt at Commerzbank, wrote in a note to clients today.

Shares on the Reykjavik stock exchange plunged by 76 per cent when trading resumed after three days of closure as Iceland’s economy continued to teeter on the brink of collapse.

Shares later recovered to leave the OMX Iceland 15 index down 47 per cent in morning trade.

Market officials said the astounding figure was misleading since the country’s three largest banks — Kaupthing, Landsbanki, Glitnir — which had accounted for three quarters of the exchange’s value, had been removed from the index after they were nationalised last week.

Other financial stocks would remain on the index but would not resume trading until Iceland’s Financial Services Authority gave the green light, the bourse said.

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