By Wojciech Moskwa
REYKJAVIK, Dec 3 (Reuters) - Facing sky-high funding costs, a weak local currency and difficulties with normal foreign exchange transactions, Icelandic business seems to have made up its mind -- the island needs the euro.
The Icelandic crown currency has lost more than two-thirds of its value against the euro in the past year -- much of that since October when three top banks collapsed under the weight of the global credit crunch.
Euro adoption would be a huge leap for the non-European Union member, which has publicly mentioned several longer-term options for its currency, including ditching it and unilaterally switching to the euro without the EU's consent.
Companies have borne the brunt of the crown's fall, which ate away Icelanders' buying power and exposed the dangers of the country's reliance on cheap foreign funding.
The economy of the North Atlantic island, with a population of just 320,000 is set to shrink by 10 percent next year and more than half of its companies are considering layoffs.
"The No. 1 task is a stable currency," Knutur Signarsson, Secretary General of the Federation of Icelandic Trade, told Reuters. "And that means the euro as soon as possible."
Signarsson and much of the business community, which has for years been a pro-European voice, wants Iceland to quickly start accession talks with the European Union.
The general populace is keen to join the bloc as well, with a poll at the end of November showing 60 percent want to see Iceland become an EU member -- still a clear majority, although down from 68 percent in a survey taken the month before.
Talks could last years but may help in the short run by tying a nominal euro anchor around the crown, stabilising it the way planned EU accession helped East European currencies.
Even Eurosceptic Prime Minister Geir Haarde has pledged another look into the merits of membership and told Reuters on Saturday he was also willing to consider unilateral adoption or a currency board linking the crown to the single currency.
Brussels has said that, in theory, any membership application by Iceland could pass quickly as it has already adopted many EU laws.
But the EU's formal position is also that unilateral euro adoption is not compatible with the bloc's treaty and cannot be a way to bypass the convergence process for joining the euro zone. The European Central Bank says on its website it shares the Brussels view.
"PIRATE ISLAND"
Iceland has secured $10 billion in foreign aid and jacked up interest rates to a record 18 percent to prevent further weakening of the crown.
But officials fear more depreciation once temporary curbs on capital flows are removed because $3 billion in hot foreign capital is parked in Icelandic bonds.
The crisis has destroyed the international credibility of Icelandic importers. In the immediate aftermath, many were refused normal 60- to 90-day delays in payments, forcing them to do all their transactions in cash.
"We became the pirate island of the business world," Signarsson said.
Meanwhile, only importers of essential items such as food, medicine and petrol were permitted to take part in currency exchanges carried out under Iceland central bank supervision.
Once the strictest restrictions were lifted last month, companies were allowed to place foreign currency orders, to be realised at an unknown "market" exchange rate in up to 10 days. Transaction times have since shortened to three or four days.
"It will make our lives much easier to have a real currency and the euro will definitely help business," said Jon Ingi Eyjolfsson, a major car importer to the North Atlantic island.
"Sooner is better, but it will take some time to get the crown stable and we need to strengthen it first," he said, reflecting a common importers' view that the crown is too weak.
Luckily, said Eyjolfsson, his company has no debts in foreign currencies -- whose soaring value is driving many Icelandic companies into the red.
According to the latest business survey from mid-October, 14 percent of all Icelandic companies said they were likely to go bankrupt within three months. Some 53 percent have cash flow problems or expected them within three months.
(Editing by Patrick Graham)