DEPOSIT INSURANCE (3)

Plan A to save Cyprus' finances and offshore banking business model was to spread the pain "thinly"; even depositors covered by the Euro100,000 guarantee would be hit for a one-off levy of 6.75%. As I said earlier, this was a terrible idea. If guaranteed deposits in Cypus could be hit unilaterally, then what about guaranteed deposits in other Euro-countries?

After protests by ordinary Cypriots and sagging markets, Plan A was ditched. Plan B, agreed last night between the Cypriot Government and their European colleagues, changes tack and spreads the pain "thickly". Small depositors will now be spared. The country's second biggest bank will be wound up, and the biggest restructured. Shareholders in them will be wiped out; bondholders (of which there are few) and big depositors will have to take a haircut. The exact size, 40%, 50% or more, will be decided within the next couple of days.

Plan B is a much better idea than Plan A. Guarantee now means what it should always have meant, just that. And the problem is tackled at source, namely that Cyprus' banks are essentially bust. Nevertheless, Plan B is not without problems. Not all of those big depositors are shady Russians, they include thrifty individuals and a lot of small businesses. Cutting off the offshore banking business at its knees will depress the Cypriot economy until an alternative is found, and that will take years rather than days. It will be sickly for a long time to come.

The Dutch head of the Euro finance ministers group said that Plan B could have been on offer last week, if only the political will had been there; which it wasn't. This shows starkly just how perniciously intertwined politics and finance have become. The days when a bank was just a place where you deposited money and wrote cheques are a thing of history.

Walter Blotscher