Imagine that you are one of the Russians who have a collective €30 billion plus on deposit in Cypriot banks. You are about to lose 9.9% (perhaps more) of those funds in expropriations. What are you going to do when the Cypriot banks re-open? Are you going to sit around waiting for the same thing to happen again (as euro crises have a habit of recurring)? Or are you going to move what remains of your money to somewhere safer, outside the EU (Switzerland perhaps, or the Caymans, or the Middle East)? I know what I'd do.
Then imagine that you are one of the 18,000 plus British pensioners resident on the island. You are also about to be expropriated. perhaps by a smaller amount than the Russians. Worse, the UK Government has stopped your pension until the current banking confusion is cleared up. And, as the banks are closed, at least until Thursday, you cannot access any of your money anyway. Are you ever going to trust a Cypriot bank again?
Finally, imagine that you are the boss of a Cypriot bank. Although you were only doing what you were told, you and your bank are being treated like lepers. The foreigners and the locals are closing their accounts like there was no tomorrow. And for you, there may not be a tomorrow. After all, for how long can you expect the ECB to keep you afloat with expensive loans? Banks rely on trust and, even if it was not entirely your fault, you have forfeited that trust.
Where will it all end?