BRUSSELS – The root of the problem in Cyprus is well known. Its two major banks had attracted huge deposits from abroad, largely from Russia, and presumably mostly from individuals who wished to escape scrutiny at home or elsewhere. The proceeds were then invested in Greek government bonds and loans to Greek companies. When Greece imploded, the investments turned sour, and the Cypriot banks that had engaged in this strategy became insolvent.
Given this situation, the logical choice for the country should have been clear: if the government wanted to survive, foreign depositors must bear part of the losses. It is thus difficult to understand why the Cypriot government was at first so reluctant to inflict any losses on depositors.