The banking and government-debt crisis in Cyprus has focused everyone's attention on the fact that it is possible for bank depositors to take losses on their deposits. This has surprised many people, who assumed that governments will always bail out depositors in full. But what if the government itself needs a bailout, as Cyprus did?

All over the world, the public has a deep desire for their deposits to be riskless. Governments feed this desire by creating deposit insurance and by continually promoting public "confidence"...