Just a short post on one point about the recent Cyprus business. (It looks like Cyprus will impose a "one-time tax" on bank deposits rather than honour its deposit insurance.)
Governments usually provide deposit insurance to prevent bank runs.
If the banking system is too big, and the banks' losses are too big, relative to the government's capacity to pay that insurance claim, that's a problem.
But the problem is very different if the government (unlike Cyprus) can print currency to pay bank deposits that are liabilities in that same currency. If worse comes to worst, the government just prints as much currency as is needed to pay the depositors what they are owed. If that means is has to print "too much" currency, that's a problem, because it means inflation will be "too high". But that inflation will adversely affect the real value of currency and bank deposits equally. So even if people expect it might happen again, this doesn't cause a bank run, where people try to get out of bank deposits into currency.
It's a very different sort of problem in a country like Cyprus where the government cannot print money. If people see a "one-time tax" on bank deposits happen once, they might expect it to happen again. And if they expect it to happen again they will try to get out of bank deposits into currency. Which is a bank run.
The difference is that inflation from printing too much money is a tax on currency too. Cyprus cannot tax currency; it can only tax bank deposits.
If the banking sector is too big, and if bank losses are too big, relative to the country's ability to pay, deposit insurance as a way to prevent bank runs is not credible and won't work in a country that cannot print.
Next week is going to be interesting. And not just in Cyprus. People have seen it has happened once, in Cyprus. Will they expect it to happen again? In other Eurozone countries?