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European officials will spend the coming days trying to convince markets and savers that what happened in Cyprus will stay in Cyprus. They had no choice but to make savers contribute to the cost of the country's €10-billion ($13.2-billion) bailout.
But breaking the taboo that deposits, whether insured or not, are sacrosanct is a first. Leaders in Brussels and Frankfurt will struggle to show that it isn't a precedent. They have a convincing case to make, provided everyone refrains from making promises that cannot be delivered.
A bank deposit, even insured, has never been synonymous with untaxable wealth. In the case of Cyprus, "insured" was a virtual reality anyway: the government does not have the first cent of the €30-billion needed to indemnify depositors if the country's banks went broke. A guarantee is only as good as the credit of the government that extends it. Cypriot deposits are safer this week than they were last Friday.
Details of Cyprus's bailout may be amended – with a softening of the blow for deposits under €100,000, and a harder hit above that – but the harm is done. The levy was always conceived as a political decision first, designed to hit what many in Europe consider a mostly-Russian money-laundering machine at the heart of the euro zone. On that basis of course, it's hard to see what would justify such a punitive tax in Spain or Portugal.
The "troika" – made up of the European Commission, the European Central Bank and the International Monetary Fund – should not have yielded to Cyprus's insistence to hit smaller savers. It has instead helped protect the country's future as a financial haven dispensing goodies such as a 10-per-cent corporate tax. The lesson from the uproar is that politics is the more powerful force. The troika clearly did not want to undermine Cyprus's newly elected president. And there was aversion in some quarters to upsetting Russia.
Euro leaders will try to speak softly and count on the ECB's big sticks to back up their words. Not one of the other struggling euro zone countries is in a situation that compares with Cyprus. Yet the first thing to do is to refrain from "never ever" promises, even made sincerely. The response to any emergency is dictated by circumstances. What needs to be done will have to be done.