Cyprus still groping for a solution to a banking crisis that's roiling Europe

Cyprus lawmakers are facing hard choices. Swallowing a bitter pill in exchange for a European bailout or leaving the eurozone are just two of them.

The instant saga of Cyprus – and whether it will go belly up, default, and shake the European, if not the world, economy like some crazed mouse that roared – continues along with enough hourly news to bring live updates here and here. 

Cyprus has until Monday to come up with $7 billion and a reform plan, or face losing its creditors and sinking into ignominious pools of red ink.

Today the Russians said "nyet" to Cypriot officials, who waited in Moscow for three days to get a possible bailout. Russian oligarchs hold at least 40 percent of Cyprus bank deposits. Cypriots had hoped, for some reason, that Russia might bail out what is essentially a banking system that thrives on helping the wealthy evade paying Russian taxes.

“The next few hours will determine the future of the country,” Reuters reports Cypriot government spokesman Christos Stylianides said today, ahead of a vote on a slew of different and changing plans to stay solvent. “We must all assume our share of the responsibility.” 

What first caught world attention was an EU-inspired plan, voted on and killed by Cyprus lawmakers this week, to tax or expropriate private bank deposits in the country. That sent a shudder through the minds of ordinary Europeans, not to mention a lot of Russians and Cypriots themselves.

Yet facing looming insolvency, the largest Cypriot bank today called for the nation’s parliament to levy a tax on holdings over 100,000 euros ($120,000), arguing the alternative is collapse.

Plans on Cypriot tables include the creation of “good” banks with credible holdings and “bad” banks with toxic holdings, and to cordon off the bad Greek bank debt whose exposure helped cause the problem in the first place, in the midst of a three-year euro crisis that started in Athens.

EU approval is essential to get the tranche of bailout funds from the European Central Bank. Today the Germans said no to a Cyprus pension raiding scheme that has been floated for days.

Cypriot banks remain closed, ostensibly until Tuesday, when no one knows what will happen; bank ATMs are for now providing petty cash for the commercial sustenance of regular folk and lines are long.

As the world starts to focus on why an island making up 0.2 percent of the EU economic picture could shake world markets, the question is being asked: Why would Cypriot officials turn their island into a quasi-money laundering center for offshore oligarchs and at the same time buy Greek debt that was already shaky – and imagine this would somehow turn out fine?

Paul Krugman of The New York Times continues to probe the story, writing Thursday that Cyprus has combined on one tiny Mediterranean island all the mistakes made by the European economies of Portugal, Greece, Spain, Italy, Ireland, and so on (the so-called “PIIGS”) that have helped bring the euro crisis to bloom. 

This includes “runaway banking,” the all-too familiar real estate bubbles brought by “massive overvaluation,” and the problem of not having enough productive capacity to pull out of a dive into debt when things went sour.

Mr. Krugman asks:

So then what? As a number of people have pointed out, Cyprus is arguably better positioned than Iceland to do an Iceland, because devaluing a reintroduced Cypriot currency could bring in a lot of tourism. But will the Cypriots — who haven’t even reconciled themselves to the end of their round-tripping business — be willing to go there