A tiny island provides a focus for questions about the way global banking bailouts should happen.
Cyprus reminds us debts must be paid
The sovereign debt menace and the related banking perils of the last few years have receded from the world's awareness in recent months. Europe's jobless rates are high and growth is nil, but Greece is peaceful enough at present, Spain is stumbling along and Ireland is actually recovering, by some measures.
But now, improbably, tiny Cyprus is in full headline-grabbing financial and political crisis. As protesters ringed the parliament in Nicosia, lawmakers unanimously rejected an unorthodox government plan to impose a levy on all bank deposits to raise €5.8bn (Dh27.4bn), money the government must find if it is to qualify for a European bailout to save its fragile banks. All the familiar symptoms kicked in: gold rose in price, the euro stumbled, markets lurched.
And a new chapter was written in the history of moral hazard. The widely-held notion that banks should not be "too big to fail" has often had an implicit corollary, that individual depositors are "too small to fail" and so must somehow be protected from loss, by governments.
Cyprus reminds us that such protection is not always possible. The government there has its own severe sovereign debt problem, and now must also prop up the country's banks, which were badly damaged by the "haircut" they and other lenders to Greece took last year.
Bank collapse, even in tiny Cyprus, could well spread fast and far. So bailout money must be found. When Greece, Italy, Spain and others had their turns at this, their austerity measures proved their resolve to the multinational institutions that provided the bailout money.
But Cyprus, needing more cash per capita, and sooner, chose this new form of tax. The move was tempting because plenty of Russian money of suspect origin is on deposit there. But so are the modest savings of many Cypriots and expatriates. The clumsy bank grab was eased by a last-minute exemption for small balances, but lawmakers refused even that.
Across Europe, bankers are watching warily for increased cash withdrawals, which would be evidence that other eurozone savers see this unprecedented form of tax as the wave of the European future.
And it may be. Deficit spending and "quantitative easing" cannot go on forever. Banks cannot be protected from their folly forever. Ultimately someone has to pay, and in that task there will be painful roles for the people who elected the politicians who ran up the deficits, for overburdened debtors, and for shareholders in banks that loaned recklessly - and also, alas, for some of the larger bank depositors.