The task of imposing losses worth about 5.8 billion euros ($7.5 billion) on lenders to the Cypriot government and depositors with the country's banks was never going to be an easy one. That effort has now led European Union to its latest impasse.

In marathon negotiations, the Cypriot government, under the supervision of the European Commission, European Central Bank and the International Monetary Fund, agreed to a one-time "tax" on bank deposits. But despite an amendment to exempt accounts containing less than 20,000 euros, the Cypriot parliament overwhelmingly rejected the plan, leaving Cyprus - and EU - in limbo.

In fact, large depositors are not unlike senior bondholders, and the proposed haircut was a small but welcome step forward. But, because it did not go far enough, a hole remained. There were other options. Lee Buchheit, a veteran sovereign-debt attorney who should have been in the negotiating room, and Mitu Gulati of Duke University have proposed an elegant "reprofiling" of Cyprus's 15 billion sovereign debt that would instantly reduce the financial pressure on the country. But such considerations were off the table well before the deliberations began.