The Cypriot government has betrayed its people

“Cyprus has become the money laundering centre of Europe,” W wrote, adding poignantly: “I am ashamed to say that I am a member of one of the biggest families in Cyprus.”

W was responding to a report I had written in December that politicians across Europe were demanding a crack-down on suspected Russian money laundering as the price of any eurozone rescue.

My piece, in turn, had been partially informed by revelations in Germany’s Der Spiegel newspaper a month earlier that the German foreign intelligence service (BND) had identified about $26bn (£17bn) of Russian money deposited in Cypriot banks – more than the entire national output of the tiny eurozone state.

With the eurozone considering a possible €17bn (£15bn) bail-out for the stricken nation, the BND warned politicians that the beneficiaries would ultimately be, as Der Spiegel put it, “Russian oligarchs, businessmen and mafiosi”.

There's no way of verifying W's allegations but Cyprus does have a chequered record. A year ago, for example, the country got into hot water for letting a Russian ship carrying 60 tonnes of ammunition bound for the Syrian regime dock, refuel and leave in violation of an EU arms embargo.

I mention all this because Cyprus’s status as a recognised tax haven and suspected money laundering state is central to Brussels’ apparently ruthless handling of the country. It is one thing to rescue a country in distress, altogether another to prop up alleged criminal enterprises.

Europe drove a very hard bargain in its negotiations with President Nicos Anastasiades. In return for a €10bn eurozone rescue package, Cyprus was told to make those suspected money launderers and tax avoiders chip in as well. The government would have to find €5.8bn to qualify for the bail-out funds – about a third of its national output. In the UK, it would be equivalent to coughing up £500bn.

Clearly, Brussels insisted the money be grabbed from depositors. But the Cypriot government’s solution was brutal. Instead of just targeting the well-off, it hit all depositors – from the labourer to the granny.

Here, I confess I am straying into speculation because we don’t yet have the detail, but it seems highly unlikely that Brussels demanded ordinary Cypriots suffer. Germany is already seen as Europe’s evil emperor, and ordering the country to make victims of innocent pensioners hardly seems sensible. Besides, Germany’s truck was with those “oligarchs and mafiosi”.

I assume that the detail of the plan was left to the Cypriot government and, that being the case, it betrayed the people.

All deposits in Europe up to €100,000 are fully protected against loss if a bank goes bust. So any depositor with less than that amount must have felt absolutely safe. Instead, they will lose 6.75pc of their entire savings.

Those with more than €100,000 would have lost everything above the threshold. In other words, someone with €120,000 on deposit would have lost €20,000. Under the government’s tax plan, though, they will lose 9.9pc – or just €12,000. The deposit tax has saved them €8,000.

Extend that to depositors with €1m, and it gets far worse. Instead of losing €900,000, that super-rich saver ends up €99,000 out of pocket. That’s a direct transfer of €801,000 from Cyprus’ ordinary people to just one of those “oligarchs and mafiosi”.

In his statement yesterday, President Anastasiades suggested he could have restricted the tax to just those with over €100,000 but they would have suffered “losses of over 60pc”. In the domesday scenario he painted, that would have pushed the “whole banking system into collapse with all the attendant consequences”.

He may have had a point, and those with more than €100,000 on deposit would have also included honest local businesses. But a better balance could have been struck than 9.9pc to 6.75pc.

The deposit numbers also tell an intriguing story. Households have about €30bn deposited with Cypriot banks and non-financial companies another €17bn, according to the European Central Bank. Of that, about €27bn is foreign – including €2bn from Britain, €4.7bn from Greece, and an estimated €18bn from Russia. In other words, the deposit tax is an international bail-out in another guise – with very particular and wealthy partners.

There has already been criticism of Brussels’ decision not to force senior bondholders to take a hit, especially as they rank alongside depositors in the creditor hierarchy. But a bondholder bail-in would have spread panic across the eurozone, ensuring capital flight from Spain, Italy and Portugal.

The one rule of the bail-outs to date has been that creditors are not haircut to help preserve some semblance of stability in the bond markets. Private sector involvement in Greece’s bail-out has been “voluntary” and tortuously negotiated.

There are suggestions the Cyprus deal will lead to depositor flight in other countries but, realistically, the only ones at risk are other suspected money laundering havens and tax shelters. Latvia springs to mind. But not Portugal, Spain, Italy or Ireland.

There will be collateral damage in Cyprus, unfortunately, and perhaps more than necessary due the government’s decisions. But, for once, a eurozone bail-out was structured to ensure the private sector shared some of the taxpayer’s pain. And that should be applauded.