If the EU wanted to end Cyprus’ status as a haven for oligarchs and other gray-market transactions, they couldn’t have done a better job.  Cyprus and the EU reached a deal yesterday on a bailout that will safeguard insured deposits up to €100,000 from any kind of seizure, but that means that larger depositors will get a bigger haircut than the 13% initially proposed in the deal rejected by the Cypriot legislature.  Foreign Minister Michael Sarris told the BBC that they could lose nearly half of their deposits:

Large depositors at Cypriot banks could lose as much as 40% of their funds as part of bailout for the crisis-hit euro-zone nation, its Finance Minister Michael Sarris said Tuesday.

He said capital controls aimed at preventing deposit flight should only be in place for a matter of weeks.

Regarding the loss likely to be suffered by people with deposits of more than 100,000 euros ($128,530) in Cyprus’ two biggest banks, he said: “The exact percentage is not yet decided but it is going to be [significant] I am afraid.”

“What I have seen suggests a number in that neighborhood” of 40%, he said.

That’s a tough neighborhood.  That’s not a haircut — it’s an amputation, and not just for the depositors.  No one in the EU or outside of it will have any confidence at all in Cyprus’ banks after either taking that kind of loss or watching others do so.  Big depositors, and investors as well, will look for other friendly banking environments, leaving Cyprus with mainly smaller depositors and little in the way of opportunities for large capital infusions.  Cyprus is essentially out of the international banking business for a very long time to come.

In fact, they’re still completely out of business, at least temporarily.  Despite a promise to reopen today, the reopening of the banks has been delayed until Thursday, and strict capital controls will be imposed to keep Cypriots from staging bank runs that could collapse the system entirely:

Many Cypriots say they felt anything but reassured by the bailout deal, however, and are expected to besiege banks as soon as they reopen after a shutdown that began over a week ago.

Reversing a previous decision to start reopening at least some banks on Tuesday, the central bank said late on Monday that they would all now stay shut until Thursday to ensure the “smooth functioning of the whole banking system”.

Little is known about the restrictions on transactions that Anastasiades said the central bank would impose, but he told Cypriots: “I want to assure you that this will be a very temporary measure that will gradually be relaxed.”

Capital controls, preventing people moving funds out of the country, are at odds with the European Union’s ideals of a common market but the government may fear an ebb tide of panic that would cause even more disruption to the local economy.

The precedent set by the EU in seizing bank deposits, especially to this extent, is still reverberating on the Continent. The European Central Bank is trying to reassure Europeans that Cyprus was a unique problem, and not a model for other bailouts, but that’s been a mixed message this week:

The banking crisis in Cyprus was a unique case and the rescue plan used should not be seen as a model for other European countries that fall into trouble, ECB Executive Board member Benoit Coeure said on Tuesday.

Coeure told Europe 1 radio that the bailout agreed for Cyprus underscored the need to improve bank regulation by having the European Central Bank act as an independent supervisor under plans for a European banking union.

He said he disagreed with Eurogroup head Jeroen Dijsselbloem’s assertion that the Cyprus bailout would serve as a model for crises elsewhere, remarks the Dutchman backtracked on after markets read them as meaning private sector bail-ins would play a greater role in future rescues.

This cannot have a salutary effect on investment in European banks, not even with all of the ECB’s assurances that it won’t seize capital again. The big seizure of accounts in Cyprus, no matter the relative context to the issues of its banking failures, has put that action on the table for every potential bailout still on the horizon in the EU. It’s simply impossible to unring that bell.