Iceland is part of the EEA and EFTA with is fully complaint with all EU financial laws. Their banking system has to comply with EU requirements and the failure to repay non-Icelandic depositors resulted in them being taken to court by the EFTA Surveillance Authority
eftasurv.int/about-the-authority/the-authority-at-a-glance-
EU law was applied in the case against Iceland and Iceland's argument was accepted
en.wikipedia.org/wiki/EFTA_Surveillance_Authority_v_Iceland
Even though its violates the founding principles of the EU (equal treatment of all EU citizens regardless of nationality and free movement of capital).
I believe you misunderstand the situation peterweg, two of the main banking groups in CY are on the verge of bankruptcy Bank of Cyprus group, Marafin popular and Marfin Laiki Bank. Most of the other banks in CY are in good fiscal order or they were until last friday.
If these two banks fail the entire banking system will collapse due to capital outflow and a lack of depositor guarantee, same as Iceland's banking system, one bad bank two down several other that were 'healthy'.
The Icesave case
In a judgment announced on 28 January 2013, the EFTA Court found that Iceland was not obliged to ensure payment of a minimum compensation to the depositors after the collapse of the Icelandic online bank Icesave in 2008.
eftasurv.int/internal-market-affairs/articles/nr/1646
The judgement: eftacourt.int/images/uploads/16_11_Judgment.pdf
It can be summed up by this
216
In the present case, difference in treatment of this kind was not possible.
Consequently, the transfer of domestic deposits - whether it leads in general to
unequal treatment or not - does not fall within the scope of the non-discrimination principle as set out in the Directive.
If a country doesn't have the money, EU laws count for nothing.