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hose who have visited Cyprus for business, or vacationed on this divided Mediterranean island’s superb beaches will be aware that its bubble inflated banking sector had, for a longtime, lost touch with reality.

Whilst this country of 800,000 inhabitants had a financial sector weighing up to ¤128 billion (US$166.55 billion), it only had a GDP of ¤17 billion. Cypriots banks were living in a fantasy world, betting on an “unbreakable” eurozone safety net, which the Greek debt crisis has blown to pieces.

Addicted to the island’s lax banking laws, low tax rates, questionable rule-of-law and high return promises, billions flew in since Cyprus entered the EU in 2004, from Russia, the former-Yugoslavia, Greece, the Middle East (Nicosia, don’t forget, stands closer to Damascus than Athens) and even Turkey, whose government is closing its eyes to Turkish controlled Northern Cyprus casinos and vast money laundering operations.

Despite the presence of an impressive British air force base on the island, suspected mafia money, from cigarette trafficking in the Balkans to weapons smuggling from the ex-socialist bloc to the Middle East, was omnipresent and has been successfully tracked by investigators to Cyprus shores, discreet warehouses and high-end luxury sea-view condominiums.

The deal, in short, was simple: Here is a perfect sunny and hospitable place where your money can be safe — because the island’s joining the EU in 2004, and its adopting the euro in January 2008 — and still roam around the world without catching too much attention from financial regulators.

While international pressure has been mounting these recent years on Swiss banking secrecy laws, and while the OECD has started to “name and shame” international tax havens, ill advised Cypriot banks were still selling to their international clientele a “catch me if you can” kind of dream.

A “hot” money shelter rather than a real banking center (Luxembourg, so far, is not on the verge of bankruptcy), Aphrodite’s island remained in a comfortable shadow, protected by its membership of the European Union while its banks — some of them partly owned by the Orthodox church — were stockpiling all kind of “junk” sovereign bonds, Cypriots, Greek or emitted by other highly indebted southern European countries.

But dreams, as we all know, often end abruptly with a sudden wake-up call. That is why, on the one hand, the ¤10 billion rescue plan adopted on Monday in Brussels after a night-long Eurogroup Finance Ministers meeting is good news for most Europeans.

Not too costly, as it aims to preserve the grossly overweight Cypriot financial sector from collapsing and threatening to take down the whole eurozone, this plan also sets a badly needed protection wall for small and medium depositors who will benefit from the ¤100,000 limit savings guarantee scheme.

Moreover, it forces large capital holders to share most of the incoming banking restructuration’s financial burden. Those who have taken the biggest risks will pay for it, and Cyprus’s Laiki Bank will go bankrupt. The island will remain in the eurozone.

Though its inhabitants will have to endure economic pain for years to come, the Cyprus crisis outcome is, in short, giving a measure of financial justice. Justice which is badly needed if they are to restore the confidence of Europeans in their banking institutions — originally shattered by the post-September 2008 Lehman Brothers failure.

Thousands miles away, busy cashing in the fruits of its current economic boom, Asia will be well advised paying close attention to events in Nicosia’s banking district.

This European effort to clean up Cypriot financial institutions will have repercussions on this side of the world. This is a moment of truth for ASEM (Asia-Europe meeting) whose 51 partners countries, including Russia and the 27 EU members, have a lot top share and benefit from each others, as reflected by the recent ASEM 2012 outlook report published by the Asia-Europe Foundation (ASEF).

Rather than enjoying a quiet Schadenfreunde, watching the apparent non-ending European efforts to put their economy back on track after years of public finances mismanagements and follies in some EU countries, far-eastern banking fortresses like Singapore, or Hong Kong, or booming emerging economies like Mongolia, Myanmar, but also Thailand, Indonesia or the Philippines shall on the contrary put their financial regulators on red alert and draw the adequate lessons from Cyprus banking sector’s collapse.

The first lesson for Asia is to be aware of greater risks of increasing “grey” money flows. Originating from Russia, the Balkans, Turkey or the Middle East, combined with tax-fraudsters money from the UK (Northern Cyprus, off limits from international and law enforcement, has been for long a haven of investment for British underworld and fraudsters), those illicit flows of cash are bound to look more and more for eastern refuges, being no longer secured in the Mediterranean fringes of the EU.

The second lesson is the expected acceleration of capital flight towards Asia from wealthy Europeans who know now for a fact that the EU can, and will, make them pay if their banks default.

Why keep their money in Europe, libeled in euros, if the certainty of a blanket protection of their assets is disappearing as the two-speed plan for Cyprus shows?

The third lesson is political: Whatever the reality of its banks balance sheets was, Cyprus remains after all a full member of the EU, therefore normally entitled to enjoy the same benefits and the same level of protection than the other 26 member countries of the world’s most powerful regional organization.

But that solidarity and full equality pact has been broken by Monday’s Brussels agreement. As Jean-
Dominique Giuliani, from the Robert Schuman Foundation, a respected think-tank, wrote in a column over the weekend, “A euro from Cyprus cannot be compared today to the euro” of the 16 other countries using the single European currency.

Capital controls enforced in Cyprus will indeed mean depositors there have less freedom and less rights — a clear discrimination in breach of the monetary union’s spirit.

The outcome of the Cypriot banking disaster is dual. The European Union may rightly take pride, in the coming days, of its capacity to overcome one more financial crisis, while signaling strongly to capital marauders than they will have now a price to pay if the banks who shelter them are going down under.

Asian governments, Central banks and regulators, shall themselves draw different conclusions: As more “grey” money from Europe will be pushed towards the east, their scrutiny of bubbles and speculative flows of cash has to increase proportionally.

And for Asian legitimate investors or depositors, especially those eager to take advantage of business or real estate opportunities in deflated, recession-prone, Europe, the lesson is clear: Better deposit your money in the coffers of big EU countries, and world-wide strong European financial institutions.

As the storm in Cyprus demonstrates, there is no longer such a thing as “blanket equality of treatment” within the European Union.

The author writes on Asia/Europe issues for the Swiss daily Le Temps