Let´s not forget that the problem with Cyprus is first and foremost a banking problem. Which takes us to the issue of banks blowing up because they have very little capital. When your capital is depleted by losses you become insolvent. If no one steps in, it´s good bye time.
So Cypriot banks will get a bail out plus liabilities are reduced via haircuts.
Everybody and theit brother are wondering about spillover effects over other Euro banks. As if Euro banks needed Cyprus to get in touble before they could get in truble. They were already in trouble. For a long long time. Basically, they haven´t had a lot of (real) capital in a long while.
Many of the most relevant Euro banks essentially have no equity capital (2-4% of total on-balance sheet assets, i.e zero capital). Any smallish reduction is asset value wipes them out.
How could this happen? Even five years after the subprime crash, banks are essentially as exposed. The reason is simple: Basel Committee rules. Banks seem extremely well capitalized according to those rules, but in truthness they are anything but. The regulatory ratios are saying “job well done, you are now robust!”. The real ratios say “you are five minutes from death”.
American banks hate all this, because the rules force them into higher real capital ratios (though still not mountainously high). American banks envy their European sibblings.
But I bet that European taxpayers and depositors are the ones envying their US counterparts.