Islands have a long tradition as pirate lairs. Of course modern airpower makes that way of life a bit impractical, so a lot of them have gone into the offshore banking business. The original offshore bank center was that inshore offshore country Switzerland, and it's still the biggest player in the game.
The principal purpose of offshore banks is for the rich, ultra-rich, random despots and (not meaning to be redundant) criminal class generally to hide their money from the tax man, law enforcement, and the revenge of the citizenry. They mostly, but not all, are islands. Cyprus, like Iceland before it, was a big player here - that is to say, much bigger than its gdp player. Their banks, like others before them, made some bad bets and now are unable to pay.
Cyprus tried a number or bad ideas (haircuts for all, theft of the people's pensions funds) before apparently settling on the one PK calls least bad.
Big depositors in Cypriot banks stand to lose circa 40 per cent of their money here, which has drawn plenty of fury and veiled threats from Russia.
But what exactly can the Russians do about this? Sell euros? Tear up double taxation agreements? Murder Cypriot bankers? Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why.
It might be that the legislators are in the worst danger.
Matt Yglesias had a rundown on how we got here.
Maybe the world will wise up and crack down on the pirates - but I doubt it.