It’s baaaack! Many thought the EU crisis had been safely put behind us, thanks to Magic Mario and the ECB’s promise to do whatever it takes to save the Euro. Even the near deadlocked election in Italy, the continued squeeze of austerity policies on Eurozone GDP (flash- it’s still shrinking), and turmoil in Spain couldn’t raise a panic.

Today, however, an amazingly cynical move by the European Commission — who seemed to figure this will only hurt Russians, so who cares? — put panic back on the table.

Cyprus is a tiny country with some very big banks, not unlike Iceland and Ireland.  In fact, deposits in the country’s banks, driven largely by Russian investors parking Euros in what they thought were safe, EU protected accounts, are many times larger than Cyprus’s GDP.  But as in Iceland and Ireland, Cypriot banks made bad bets — mainly on Greek sovereign debt (oops!) — and now cannot meet their obligations.

Now Cyprus’ second largest bank is about to collapse, other banks are in deep trouble as well, and the entire financial sector could implode due to interbank ties. So the EU decided the only way to stabilize the situation was to reduce the bank’s immediate debts by taking money from depositors!  Every depositor in Cyprus’ banks was told they will lose either 9.9% of their deposits — for accounts over 100,000 Euros — or 6.75% for smaller accounts.  This is intended to raise roughly six billion Euros to put toward a seventeen billion Euro bailout, with the rest provided by the EU.

About half of the bailout money will come from Russian banks and corporations, who have 31 billion dollars sitting in Cypriot bank accounts.  The other half will come from European and Cypriot depositors.

This is not plain highway robberty — the Cypriot Prime Minister has promised that depositors would be offered bank shares (!) covering the full amount of their losses.  In addition, he promised that those who left their savings in banks for another two years would be rewarded with bonds backed by future income expected to come from development of Cyprus’s natural gas deposits.  This makes the haircut more of a forced loan, with depositors’ losses being — hopefully — returned with interest or capital gains a few years from now, if all goes well.

Still, this is a remarkable measure to take.  To be sure it is still pending; Cyprus’s Parliament still must approve the deal, and negotiations are continuing to see if smaller depositors can be spared some pain.  Nonetheless, it is an amazing act — depositors with billions of dollars in cash in EU banks, with deposits denominated in Euros, will wake up Tuesday to find they have 10% less cash in those accounts than they had on Friday.

Normally, this kind of instability of Euro accounts would create a panic — if a Euro in the bank in cash on Friday is worth only nine-tenths of a Euro in the bank the following Tuesday, why should anyone hold Euros in EU bank accounts?  What guarantee is there that the EU commission or ECB won’t rescue soggy banks — of which there remain many in the EU — by using similar measures elsewhere?  None, of course, is the answer.

The only reason this makes any sense is that the overwhelming portion of large accounts in Cypriot banks are held by overseas depositors, mainly Russians.  This means that Europeans may not have to fear that their accounts in their banks will be treated the same way.   Still, this is a crazy precedent.  Banks rely on the belief by depositors that all cash account holders will be treated the same way.  If this ceases to be true, the entire banking industry may be in for a shake-up.

So this is step with unforeseeable consequences.  Obviously, the European Commission thinks this is no big deal, that other countries will see Cyprus as a rare exception, and that fears of contagion or repeat of this policy will quickly fade.  Perhaps they are right.

It will be an interesting week to watch.