We now have a new deal for Cyprus, one that looks a fair bit closer to what the first deal should have been and what the IMF originally proposed. In particular, it backs away from the attempt to impose a levy on depositors covered by the EU-wide €100,000 deposit insurance and instead puts the burden on large depositors and also bails in bank bondholders.
Despite this belated shift to a — relatively — more sensible plan, the outlook for the Cypriot economy remains grim, with forecasts of GDP losses of 10% or possibly much more.
Moreover, in a now familiar pattern, not content with stuffing up the original deal, the authorities seem to have once again managed to bungle the message accompanying the new deal. Initially, the head of the Eurogroup of eurozone finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, said that the Cyprus agreement would serve as a model for dealing with future banking crises. Then he quickly changed his mind, deciding that Cyprus wasn't a model after all. So much for policymakers delivering a clear and consistent line.
Meanwhile, the debate has moved on to the implications of Nicosia's (almost inevitable) decision to impose capital controls in an effort to stem depositor flight.
In particular, several observers have already noted that the introduction of capital controls undermines the concept of European monetary union and indicates that the value of a euro in Cyprus is no longer the same as that of a euro held elsewhere in the eurozone. Seen in that light, it's possible to argue that, at least technically, Cyprus has become the first country to be forced out of the eurozone.
During the first half of last year, there was a big debate over whether Greece would have to exit (remember 'Grexit'?) and if so, whether this would topple the first domino in a chain that would ultimately unwind the single currency. In the event, Greece stayed in, not least because Berlin was eventually convinced that the risk of allowing that first domino to fall was too great. Instead, it looks like it will be Cyprus that gets the role of the first domino.
Brussels is now betting that Cyprus is too small and too much of a special case to set the other dominoes falling. The good news is that, so far at least, the evidence is that financial markets seem to agree. Of course, some of Brussels' other bets haven't worked out that well.