The EU avoided a potential fiscal meltdown in the tiny island nation of Cyprus that might have triggered a cascade across Europe in the debt crisis. Instead of giving all depositors a “haircut,” the new plan leaves intact the insured deposits of €100K or less — but everyone else gets the haircut up front:

Cyprus secured a 10 billion euro ($13 billion) package of rescue loans in tense, last-ditch negotiations early Monday, saving the country from a banking system collapse and bankruptcy that could have destabilized the entire euro area.

“We’ve put an end to the uncertainty that has affected Cyprus and the euro area over the past week,” said Jeroen Dijsselbloem, who chairs the meetings of the 17-nation eurozone’s finance ministers.

In return for the bailout, Cyprus must drastically shrink its outsized banking sector, cut its budget, implement structural reforms and privatize state assets, he said. The country’s second-largest bank will be shut down immediately, with all bond holders and people with more than 100,000 euros in their bank accounts there facing significant losses. The measures are likely to deepen the recession in Cyprus and lead to more job losses.

Cypriot officials obviously prefer this to the alternatives, but no one’s high-fiving on the island today:

“It’s not that we won a battle, but we really have avoided a disastrous exit from the eurozone,” said Cyprus’ Finance Minister Michalis Sarris. “A long period of uncertainty and insecurity surrounding the Cyprus economy has ended.”

The eurozone finance ministers accepted the plan, reached after more than 10 hours of negotiations in Brussels between Cypriot officials and the so-called troika of creditors — the International Monetary Fund, the European Commission and the ECB.

CNN followed up with this report earlier in the morning:

So the biggest losers will be the Russians, who tried to pull a fast one on the EU with a Gazprom deal that would have maintained the banking structure that their oligarchs exploit in exchange for Cyprus’ natural-gas rights.  Much of the pain will be felt by those depositors who used Cyprus to launder cash, it seems, but not all of the pain.  The bubble created by that influx of wealth will dissipate, and many ordinary Cypriot businessmen will take a big hit from the confiscation, and then from the loss of demand in the marketplace.

The question becomes this: how long will it take before Cyprus’ version of Beppo Grillo arises to screw up the austerity plan?  Probably not as long as it took in Italy, which may be another reason why the EU and its partners wanted the money up front this time.  Don’t expect the Russians to give up so easily, either.