“Your Comment: One might ask why this approach was not adopted from the outset of the Eurozone's banking problems since it puts the onus of responsibility on the lenders to a failed institution rather than the citizens of the country in which that bank is domiciled.

“Response: Probably because once depositors take a hit, the banking public will be far more wary about keeping cash funds in banks and instead hold securities and precious metals. It will also cause mass migration of funds to those countries with quality economies and banks. This in turn will cause politicos to impose funds transfer controls and one is back to moribund banking.”

Eoin Treacy's view Thank you for this contribution. One might consider that the approach taken to the Eurozone's financial crisis to date has already resulted in a moribund banking environment because they have sought to treat the symptoms rather than the cause of the problem.

The root of the Eurozone's financial problems lie in the fact that banks, insurance companies and pension funds assumed that the Euro would equalize risk premia across the currency union regardless of the fact that no formal transfer mechanism or regulatory reform had taken place. Bad investment decisions were made and the regulatory system on much of the European periphery would not pass muster under any kind of due diligence. Whether this is the fault of the creditor or the borrower is irrelevant post fact.

The solution so far has been to force sovereigns to socialize private sector debt. This has in turn put sovereigns under extreme pressure and resulted in a number of countries applying for large bailouts. The austerity this entailed has improved competitiveness but unemployment is high and growth low. Quite where growth is going to come from in Greece, Portugal, Spain, Italy and Cyprus is open to question. Ireland's large export oriented sector has softened the blow somewhat but the domestic economy remains under pressure.

The European Stability Mechanism was envisaged as a fund through which countries could access capital in case of financial difficulty but at €500 billion is not enough to cater to the size of the problem should Italy run into trouble. The approach to Cyprus's banks marks a change of character in how the Eurozone handles its problems not least because creditors are being asked to take the first hit rather than the last. This seems to suggest some form of understanding that the socialization of private sector debts is unsustainable. As such it most definitely is a template for future action. Whether it is adopted when a larger country is under scrutiny is an entirely different question.

The big question is not so much how this will affect a small country like Cyprus or whether the same formula will be employed with Slovenia but rather what approach will be taken to banks in larger countries such as Spain or Italy. The very fact that we are asking this question raises the potential for capital flight that you mention above. Singapore's financial sector index broke out of its most recent range today suggesting that at least some money is seeking a country with quality banks and institutions.

The US banking sector is recovering precisely because it was forced to accept losses early. If Europe can achieve the same then the medium to long-term outlook will be positive. However since the approach taken to the banking sector has been anything but consistent, the prospect for additional short-term volatility remains high.