Agreed that no depositor should be hit. The failure here is that of the ECB which has not managed to regulate banks properly to reduce the risks of failure.
It's trying to avoid avoid reality. What you are saying is that no one should ever be hit. banks shouldn't fail. The reality is that banks do fail. They fail because of bad management. They fail because of bad financial environment. They fail because of bad regulation. Whatever. They do fail. That is reality.
We need rules that define what happens when they do fail. We need to be able to survive bank failures the way we can survive failures of other companies.
We can't just keep deciding that banks should never fail again.
Poorly managed banks should be allowed to fail just like any other business - creative destruction is a vital part of a free market economy.
However, what to do now that "too big to fail" banks are so common?
In Cyprus, I'd say put these banks into some sort of bankruptcy. Give everyone haircuts in whatever order a court (remember rule of law?), not some dark room full of politicians, beuarocrats and bankers decides is correct. Then have the Cypriot government or the EU (we also need to figure out who is liable here) make good on the promises to insured depositors.
I don't see how dooming the next generation of Cypriot taxpayers to high taxes and low public services in order to save uninsured depositors who benefited from the high interest rates these risky accounts yielded from taking a haircut. Not from a legal perspective, or a moral one. It doesn't sit well with socialism or with capitalism.
I don't buy the argument that it will in any way preserve choruses ability to borrow in international markets.
So what would happen if the Cypriot government couldn't handle the payouts required?
Here is the full list:
http://www.financialstabilityboard.org/publications/r_121031...
If you are management at one of these banks, you essentially have a risk-free business, and can do whatever you want without fear of bankruptcy or prosecution.