Cyprus faces a deep recession, but the eurozone and markets have shown they don't care much for a small 'rogue' state
Fittingly, a week of turmoil in Cyprus ended in confusion. The government in Nicosia was in marathon talks with the European Union, the European Central Bank and the International Monetary Fund on Friday amid speculation that a deal would be done over the weekend to prevent Cyprus from going bust on Monday.
But even at this stage, five broad conclusions can be drawn at the end of another tumultuous week in the life of the euro. Firstly, the proposal to exempt deposit holders of less than €100,000 (£85,000) from the bailout levy is as sensible as the failure to include this clause from the outset was foolish. Much angst would have been avoided had those with deposits of above €100,000 been targeted for the €5.8bn demanded by the troika in return for a €10bn financial lifeline.
As a result of this blunder, a drama has been turned into a crisis. Tough capital controls will now be needed to prevent a full-scale run when the banks finally open for business again, together with a possible restructuring of the banking system to create a "good" bank and a "bad" bank.
The second conclusion is that the other 16 members of the eurozone don't really care much about Cyprus, and would not lose much sleep if it left the single currency. That contrasts sharply with the attitude towards the other bailout countries - Greece, Ireland and Portugal - where there was much less of the take-it-or-leave-it brinkmanship than has been displayed over the past seven days. This approach is not just driven by the fact that Cyprus is a small country accounting for only 0.2% of eurozone GDP. There is also the feeling - in countries such as Germany - that Cyprus is a bit of a rogue state, one that has been happy to base its economy on laundering "dirty" money from Russia. Angela Merkel sees no reason why a crisis in a tax haven should spread to Italy or Spain.
Thirdly, this view appears to be shared by the financial markets, which have so far been profoundly relaxed about events in Cyprus. True, the euro has dipped a bit and the bourses have had better weeks, but there has been no upward spike in the interest rates on Italian, Spanish or Portuguese debt - the key indicator of contagion risk. Some analysts said this was a highly encouraging developing sign, suggesting that the problems of Cyprus had been ring-fenced. Others, such as Stephen Lewis at Monument Securities, are troubled that markets have been "de-sensitised" to bad news by the willingness of central banks to flood banking systems with liquidity.
Fourthly, Cyprus faces a bleak future even if its banks are rescued and euro membership safeguarded. It will not be allowed to retain its status as the tax haven of choice for wealthy Muscovites and will be forced to undergo a much more severe dose of the economic rebalancing needed by the UK. Cyprus will have a public debt-to-GDP ratio (145%) above that of Greece even on the assumption that it gets €10bn of financial help from the troika and it writes off €5.8bn in bank debt. That looks unsustainable, particularly since a savage austerity programme that is a precondition for the troika loan will send the economy deeper into recession.
Finally, the eurozone is kidding itself if it thinks it has completely corralled the crisis. Bank depositors in other member states will not forget that the eurozone was willing at one part to target depositors big and small. They will also have picked up that when Cyprus pushed back against the original plan, the eurozone blinked.
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