I actually think that they are pushing it in the right direction.
Agreed.... surely this is exactly how things are supposed to work.
A bank, at the end of the day, is just a company. It has liabilities (equity, bonds, deposits, etc.) and has assets (the loans it has made, the assets it has bought from others, etc, etc).
When you "deposit" money in a bank, you are *lending* that money to the bank. Your deposit becomes a liability of the bank and the cash you paid is the matching asset.... and the bank quickly uses that cash to purchase other assets... assets that it hopes will yield more than the interest it is paying you on your deposit.
If the value of those assets shrinks (as has happened to the Cyprus banks thanks to the dodgy Greek government bonds they bought) then they have a problem: somebody isn't going to get paid back!
We have a well-understood process for solving this problem with "normal" companies.... first the equity holders get hit.... once they're wiped out, the next layer of the capital structure (junior bondholders, perhaps) get hit.... if they're wiped out, the senior bondholders get hit and so on and so on until we're done.
Part of the problem with the financial crisis is that this process *wasn't* followed with bank bailouts.... bondholders were not wiped out e.g. in Ireland and Irish taxpayers were stung to pay out the bonds at par.... madness!
In Cyprus, it looks like the EU (albeit by accident!) have done the right thing... equity holders were wiped out... bondholders were wiped out and those who had lent large amounts of cash were also hit.
It would have been better to put the bank into resolution, hit *all* the depositors and then use deposit insurance to pay back the <€100k people... but as the Cypriot state was bankrupt that wouldn't have worked.... so the solution was fudged... but not as badly as it could have been.
Not pretty.... but it could have been even worse :-(
