Cyprus is something like an Iceland-2. The government is not the main culprit for the problems, but it is loaded with the expectations to find a solution. So something is wrong with the principles of the global finances.
It is not possible a government to be a guarantor of money that exceeds tens of times all government assets and at least 3-4 times the entire GDP of the country. This simply is not possible. Imagine Apple to become a guarantor of a debt that is $1,5 trillion? Imagine somehow the company is loaded with such a size of debt. Will anyone believe Apple can cover and repay this sum that is 4 times its market capitalization and tens of times more than all the sales?
Obviously the answer is No.
But exactly this happened with Iceland first and now with Cyprus. These countries had too developed banking sector that accumulated deposits and credits that are much bigger than the overall size of the countrys GDP. And at the same time there is a deposit-protection system that is backed only by the small local government.
In fact there is no a real deposit protection system. The government have no the resources to repay the deposits even if it wanted to do this. There is no enough economy and taxpayers to be taxed to find this money. Even if the government privatizes everything, including the future income of natural resources sales, even then there will be no enough money to repay the deposits.
In fact the only real assets in Cyprus are the deposits. So the only thing that can be taxed is the same money that is to be guaranteed. But granting a money by taxing the same money simply means that there is no a deposit protection system.
This is a big mistake in global finances. Small governments that formally hold the jurisdiction of a large number of deposits cannot be responsible of these deposits. These are not resources, invested in Cyprian economy to create the relevant product and relevant GDP. These are just deposits of businesses that are actually outside Cyprus. So there is neither logic nor possibility this money to be guaranteed by a poor government and its less than 1 million taxpayers.
The logical and economically backed deposit-protection system must be something like the guarantors to be connected with the real economy whose money is formally deposited in Cyprus. I.e. if much Russian capitals are deposited in Cyprus, so at least part of the deposits must be reinsured in Russia. If much of the deposits are of German companies, this money must be reinsured in Germany, where the real production and jobs are.
It is an absurd situation the population of Cyprus to be de facto enslaved and obliged to pay the losses of too many foreign depositors. This is simply impossible. If taxed too much, people will simply run away from Cyprus.
In Iceland the decision was very simple and very brave. When the banks went bankrupt the government simply refused to guarantee the foreign deposits. Never the less EU strongly pressed the Iceland politicians, they simply rejected any bailout. The banks went default, and foreign depositors simply lost their money. And in fact other outcome was simply impossible. There was no way 0,3 million people to repay tens of billions of bank losses.
Iceland was not in EU, and formally there was no an obligation for it to guarantee something. Iceland was not a Euro-zone member that allowed the economy to continue working even when the flow of foreign capital had stopped.
Cyprus is exactly the same case and there is no other choice. It must simply guarantee the deposits of its own population that is absolutely possible as this population is working there and is connected with the local economy. The money of foreigners will simply vaporize. And as all this means de facto an exit from EU, this is logical to happen, along with reestablishing the old Cyprus currency.
It is not a question of egoism or nationalism. It is a question of realism and real possible options.
March 22st 2013