After Greece, Ireland, Italy and Spain, fixing tiny Cyprus' problems should have been quick work for European leaders and financial institutions. Instead, the deal to fix the island's troubled economy has raised doubts about one of the most sacred of banking principles and undermined assumptions about best banking practices. It sets a worrying precedent.
With a population of a little over 1 million people, Cyprus is the eurozone's third-smallest economy, with a gross domestic product of $23.5 billion in 2012. It actually handled the 2008 global financial crisis well; its recession was much milder than that of most euro economies and it has registered higher growth than its neighbors.
Unfortunately Cypriot competence was swamped by the Greek debacle. Not only is the Cypriot economy closely tied to that of its much larger neighbor, but the banks in Cyprus were holding large amounts of Greek debt. When Greece wrote down that debt — giving what is sometimes called a "haircut" to its creditors — Cypriot banks took a big hit.