Because the banks need cash NOW and if the cypriot state would have bailed out the banks the country it self would not be sustainable debt-wise, it cannot even pay the bond matureing in June by it self. Tthe banking sector is just way too big (8x GDP) for a solution like that. Quite similar to the situation Iceland was in. They should just guarantee insured deposits, default on as much as necessary on the rest and restructure their sovereign debt with the help of the EU. And then start a fresh and concentrate on tourism, domestic services and their newly found nat gas. The tax haven and russian gangster finance model is now dead anyways. If similar islands like Malta can do it (they had a 7% budget surplus last year), Cyprus should be able to make it too.
What you say makes sense to me. It seems that politics and protecting "fat cats" almost always gets in the way of letting financial institutions go bankrupt.
Yes they did double down, they erronously thought they will help their brothers in Greece and screw the Germans at the same time i.e. kill two birds with one stone. Why screw the Germans you say, because Germans invaded Greece in WWII, helped their bitter enemy Turks during the WW I i.e. historical...
It's all smoke and mirrors imho. The usual sort will make loads of money out of this squalid affair while the average guys take a beating. Wolf and sheep and on to the next victim.