While the post on this is rather long - and requires some background - I've broken down the Cyprus mess into five easy to understand bullet points. From Cyprus.com ...
* THE PLAYERS: Of all the banks in Cyprus, it's the two major Cyprus banks that are in trouble, Laiki Bank and the Bank of Cyprus. Both are exposed to the Greek financial mess, but Laiki is the real problem.
* BACKGROUND: Laiki is owned by a private Greek group called Marfin Investment Group, which is also backed with Gulf money. The Bank of Cyprus is "locally" owned. The Marfin group abandoned long standing conservative investment policies and pushed for an "aggressive" (when do we start calling this "stupid and greedy") investment strategy, which led the bank to purchase high yield but incredibly risky Greek bonds. This is what got them in trouble.
* THE (incredibly stupid) DEAL: Cyprus' new president Nicos Anastasiades went to the European Union and accepted a bailout package that included "taxing" the bank deposits of ordinary Cypriots. So, yeah, to pay for the stupid investment decisions of private bankers the idea is to slap insured depositors across the face by making them pay for the bank bailout (in the process taking 6-10 percent out of every checking, payroll, escrow, pension, trust, payment-in-transit and any other account held in a Cyprus bank).
* THE RUSSIAN ANGLE: Private Russian interests, who are notorious for escaping taxes in Russia by laundering their money through Cyprus ("tax arbitrage"), have billions in an independent Cyprus bank that is Russian owned. They are ticked off that their incredibly solvent bank (laundering money is a lucrative business), which has billions on hand, could be forced to pay for the bailout.
* THE BANK RUN THREAT: Whether or not Cyprus goes through with the threat of "taxing" insured bank deposit accounts, the threat is going to lead to a bank run when the banks open on Tuesday. This "will severely cramp Cyprus’s main economic driver the last 2 years (selling real estate, tourism and accounting services to Russians)."
So, if we go by these primary points, the real issue is whether the EU and Cyprus want to bailout private banks - who stupidly over bought Greek bonds - and Russian money launderers, who want to escape paying taxes in Russia.
There's more to the story, but one thing is clear: We need to create a global and transparent tax and investment treaty that doesn't encourage global market players to focus on "tax arbitrage" and depend on bailout profits as their preferred business strategy.