Banks in Cyprus have been closed to prevent a run on deposits after initial plans for a tax on all accounts -- since abandoned -- were revealed last weekend. ATMs have continued to function but long queues have formed at some banks.
In the absence of a rescue, Cypriots and foreign depositors will rush to withdraw cash as soon as they can. The government could extend the bank holiday again, and impose limits on financial transactions, but that would only delay the inevitable.
"The longer the restrictions on withdrawing and transferring assets continue, the more it increases the chances of drastic capital flight once they are lifted," wrote IHS Global Insight analyst Sean Harrison in a report.
Restricting the movement of capital wouldn't solve the country's banking crisis but only further depress activity in a recession-hit economy dependent on financial services and tourism, exacerbating the government's debt crisis.
Cyprus could close its two weakest banks -- it is already working on a plan to restructure one of them, Popular Bank of Cyprus -- but depositors would face big losses, further undermining confidence in the system as a whole.
Unable to restore trust in its banks and with an economy locked in a downward spiral, social and political unrest would escalate quickly. At that point, Cyprus may decide it has no option but to abandon the euro and start printing its own currency.
A new Cyprus pound would be worth much less than the euro, imposing even more pain on depositors than the original bank levy rejected by parliament on Tuesday.
Despair as Cyprus banks stay closed
What would a Cyprexit mean for the eurozone?
"If a collapse were to occur, we maintain our view that Cyprus is so different from any other eurozone country and banking system that contagion is far from obvious," said Unicredit chief economist Erik Nielsen.
Still, it's possible the ECB could feel pressure to take emergency steps to prop up markets by, for example, purchasing government bonds.
Spain has secured an EU-backed bailout of its banking industry, and policymakers and investors appear at this point to be relaxed about the absence of a government in Rome, pointing to measures already taken to control its borrowing.
Some analysts believe it's more likely that another small eurozone country -- Slovenia -- could move center stage if Cyprus collapses.
Slovenia has an economy twice the size of Cyprus, but it has already been forced to bail out its banking sector, which is plagued by a high and rising rate of bad loans, and a new government may struggle to fund the recapitalization.
The International Monetary Fund says Slovenia may need to provide an extra €1 billion in capital for its three largest banks, at a time when the country's debt burden is rising due to a recession caused by poor export demand and austerity measures.