The New York Times reports

In the early hours of Saturday morning, after 10 hours of talks, finance ministers from euro area countries, the International Monetary Fund and the European Central Bank agreed on terms that include a one-time tax of 9.9 percent on Cypriot bank deposits of more than 100,000 euros, and a tax of 6.75 percent on smaller deposits, European Union officials said.

Pointer from Tyler Cowen, who thought it worthy of a follow-up. A couple of further thoughts:

My understanding is that the depositors would receive bank equity in exchange for debt. No one believes that this will make them happy. (Perhaps the depositors should be asked to read Admati and Hellwig?) In fact, every economist I have read has pretty much the same reaction as mine to this policy.

While a surprise tax on bank deposits may seem like the best idea that the eurocrats could come up with under the circumstances, it might not bode well for the longer term. In terms of the two drunks model, this looks like both drunks falling down without making it home.

Consider: Suppose that you hold bank deposits in a bank in a fiscally troubled country, such as Italy, Portugal, Spain, or Japan. You are deciding whether to keep those deposits there. Until Friday, you had not considered that the government might confiscate a portion of your deposits. Now, how much assurance do you need that your deposits will not be suddenly taxed in order to keep you from running to your bank and shifting your funds elsewhere? Solve for the equilibrium, as Tyler would say.