Okay, maybe the title of this post is over the top. Cyprus still uses the euro and has access to the ELA program sponsored by the ECB.
On the other hand, consider this scenario. If you have €500 deposited in a Deutsche Bank branch in Munich and want to buy a new tv, you can make your way to the ATM, withdraw your euros and take a trip to the local mall to buy your tv with cash.
What if your €500 is deposited in any bank in Cyprus instead? The banks are closed and cash withdrawals are limited, so you do not have access to your euros and cannot buy that tv. Under the circumstances, wouldn’t you rather have your euros in another country? Doesn’t this make euros in Cyprus worth less?
While cash is the same in either country, bank deposits are now denominated in two types of euros, standard and Cypriot, the only difference being that the latter is less liquid than the former. Inexorably, the new, Cypriot euro will spread to other countries in the periphery as they run into trouble.