It is hard to read the current media on the economic crisis in Cyprus as it is defined in the absence of history. Articles like that by Peter Spiegel, Kerin Hope and Quentin Peel, "A poor diagnosis, a bitter pill," The Financial Times, March 23, 2013, are focused on the present and that is understandable. Yet it is clear that the past is a significant source of understanding for the present dilemma the EU leadership finds itself in over the banking collapse.
We should recall that even before independence from Britain conflict exploded between Greek and Turkish Cypriots after violent attacked by the Greek Cypriot terrorist organization, EOKA (see Loizos, Peter, "Intercommunal killing in Cyprus," Man, v. 23, n. 4, 1988:639-653). In the early years after independence, 1963-1968, Greeks Cypriots (and via EOKA) used violence in an attempt to force union with Greece. On July 14 1974 Greek Cypriot separatists with the help of the Greek army overthrew the coalition government of Greek and Turkish Cypriots and precipitated an invasion of the island by Turkish troops, given the history of murders of Turkish Cypriots by separatists.
In the immediate terms of ceasefire and the creation of a line of separation, a stasis was created between a once integrated Cyprus and ethnic Turks and Greeks fled to opposite sides of the island. A Greek Cypriot "state" was formed of the rump southern part of the island and since 1975 has come to function as a rouge state, with low taxation, little oversight in tax evasion schemes and as a money laundering center. It functioned as a stop over for Serbian arms purchases in the Yugoslav civil war.
Black money money from Russia and elsewhere has used Cypriot banks as Adam Taylor notes in his article on Sergei Magnitsky in Business Insider published on March 22nd, 2013 (see: http://www.businessinsider.com/...). Documentation of money laundering in Cyprus has been published by the German magazine Spiegel on November 6th 2012 (see: http://www.spiegel.de/...). An euobserver.com article (3/19/13) that interviewed several experts in money laundering describes how difficult the situation is to study (http://euobserver.com/...). A neurope.com article published on March 23, 2013 shows that examination of Cypriot banks alone with not come close to trace the extent of identification money laundering there, rather the worldwide elimination of limited liability corporations that hide ownership and wealth transfers are needed (http://www.neurope.eu/...).
Cyprus has lived on property speculation, tourism, black market trading and money laundering since independence. Greek Cypriot separatists have prevented a rational resolution of the island's division and the EU supported their racist and nationalist actions by admitting Cyprus before it had met even the rudiments of compliance with financial standards and law. Claims by the former Finance Minister, Takis Klerides that Cyprus was being thrown out of the EU family are ludicrous given the "special" adoption they experienced to join the flock. The EU should take one of three approaches to deal with the current crisis and the main focus should not be the financial obligations to an EU country, but the continued existence of a criminal situation that dominates the island and has benefited a few who have made a living avoiding international law.
1. Route of least resistance: Push Cyprus out of EU, let the Russians loot the banks before and then give the island to the Turks to administer with a local elected parliament. The criminals and the racist Cypriot separatists would be unhappy but the island would no longer be a seat of international crime.
2. Ethical route: EU seizes banks and all foreign deposits and forces depositors to justify all money in accounts as legal income. Dissolve government and transfer control to the Turks as in #1. This would not make the Russians or the criminals and Cypriot separatists happy but is the responsible thing to do.
3. EU seizes banks, dissolves government, a plebiscite is held on federalism with Turkey or a permanent division of the island between Greece and Turkey. This would also accomplish all in #2.