Assume the crisis in Cyprusis patched up this weekend or on Monday – it is still the way to bet because both sides have too much to lose. After its struggles in Athens and elsewhere, the eurogroup surely won’t let a member of the single currency fall out for the sake of a few billion euros.

Equally, the Cypriot government must know what a hole it is in. There is no salvation from Russia; and, by threatening to cut off liquidity from the country’s stricken banks, the European Central Bank has put its credibility on the line. The main ingredients are all there for another serving of euro fudge.

But what would come next? For Cyprus, the immediate future is bleak. In effect, Germany is telling the country to find a new occupation. Bloated offshore banking, with a speciality in Russian deposits, doesn’t fit the shiny new euro model of banking union. Try tourism, perhaps. Cypriots might complain these rules were not made clear when they joined the euro only five years ago. They’d be right. But their best strategy today is to stay within the club and, like Greece, try to negotiate better terms another day.

It’s the reaction outside Cyprus that matters for the future of the euro. Investors’ postmortem on the mess could be dangerous. Two points will stand out:

First, the handling of the crisis has been farcical, and has undermined confidence in Berlin’s and Brussels’ firefighting skills. Woe in Nicosia was inevitable once the last Greek restructuring whacked bondholders, including Cypriot banks.

Yet, with ample time for all sides to prepare, the banks have been closed for a week and the negotiations are going down to the wire. True, Cypriot politics aren’t easy. But next time it might be Italian politics.

Second, confidence has been shattered in the notion that eurozone depositors with less than €100,000 are sacrosanct. Under plan A the eurogroup was prepared to trample on the one principle that was understood across the continent.

There’s no knowing the damage that will do. And how will bigger depositors in Spanish and Italian banks react? If their instinct is to seek safety elsewhere, a lot more trouble is in store

Guardian