Here's the thing: In a heavily bank-based economy like Cyprus, the banks provide most of the income for the government, directly or indirectly. When your banks are many times larger than your economy, the taxes you extract from those banks are also many times larger than your economy, and the money those banks pay employee's IS the economy. So, sort of by definition, when the banks fail, so will the government.
Cyprus has been attracting investments from all over the world for years and years. While financial products are not a traditional "export", it is a sort of product that can grow an economy. While cyprus may have been diversified nowhere near enough, they were at least doing something, and the government actually tried to encourage this thing to grow, rather than throw roadblocks at it like much of the rest of the world.
On the other hand, Greece really wasn't doing much of anything except spending money and then borrowing more. I maintain that this whole entire debacle was Greece's fault, Greece was the one that actually wasted the money. The Cypriots were just trying the best they could (although in somewhat of a naiive way) to make the best economy they could on a little island.
I agree. Partially. While what you say is likely to be accurate, there were other things going on in Cyprus at the same time. Like insane spending by the government (6 or 7 billions in debt they can't pay back) and unimaginably reckless "investment" policies of the two largest ("TBTF") banks. Which by the way grew to be TBTF as a result of local CB's/govt's licensing policy. (stifling competition)
I don't think the Cyprus government stifled competition at all. I had a friend that was selling securities out of Cyprus up until a year ago (thank god) when he switched to Panama. If anything they were reckless in their handing out licenses (Genius Funds).
And as for Government debt, note the first paragraph in my previous reply. They were counting on their main industry, banks, continuing to provide revenue. Its pretty hard to balance a budget when suddenly a very lucrative income stream suddenly disappears. They weren't perfect, but they were at least rational.
