Just as his release of embarrassing secrets about U.S. cyber intelligence tarnished Washington’s relations with many European nations last month, so have Edward Snowden’s leaks now led to a serious diplomatic stand-off between Australia and Indonesia.

The crisis comes in response to stories earlier this week in the Guardian Australia and Australian Broadcasting Corporation, based on files stolen by the fugitive national security leaker. The revelations showed that Australian intelligence services had attempted to listen in on the telephone conversations of Indonesian President Susilo Bambang Yudhoyono and his wife in 2009.

That prompted furious protests from Jakarta, the recall of the Indonesian ambassador to Australia and calls for Canberra to adopt a “no spy” agreement of the kind it has with Britain, Canada, New Zealand and the U.S., its most important ally. Prime Minister Tony Abbott expressed regret over the incident, but refused to apologise or explain the phone tapping to his counterpart. President Susilo Bambang Yudhoyono took to twitter to denounce Mr Abbott, and his government has pulled the plug on co-operation with Australia on people smuggling, intelligence exchanges and military training exercises. A perfect storm of trouble in the Antipodes.

Of course, few international problems have proved as difficult for Canberra as the development of a friendly policy towards Jakarta. No two neighbors anywhere on earth are so comprehensively unalike: Australia and Indonesia have different languages, cultures, religions, histories, ethnicities, legal systems and population sizes. From the annexation of West Papua in 1962 and the invasion of East Timor in 1975 to the scrapping of the security treaty in the lead up to Australia’s leading peace-keeping role in East Timor in 1999 and the fracas over Canberra’s acceptance of West Papua refugees in 2006, the relationship has often been a rocky one.

The latest standoff has the potential to escalate, but it is to be hoped the most sensational information from Mr Snowden’s classified material has come out already, which would mean any “scoops” appear repetitive.

Still, Mr Snowden has a scored a victory of sorts by stealing U.S. secrets: he has forced the issue of espionage onto the front pages of regional newspapers and reinforced the stereotype of Australia as Uncle Sam’s deputy sheriff in south-east Asia. Never mind that a little snooping is a good thing. By learning capabilities and intentions of one’s neighbour, espionage helps reduce the prospects of conflict. Many Australian lives have been lost or threatened by terrorist attacks, bombings and even military action from Bali to Jakarta to East Timor. It is reasonable to expect Australia’s intelligence agencies to do all they can to safeguard Australian lives, using whatever tools at their disposal, Indonesia’s 3G network included.

For all their expressions of outrage, moreover, the Indonesians have long known that the Americans and Australians eavesdrop on their country. Indeed, the Australian embassy in Jakarta was the location of the first global station of the Australian Secret Intelligence Service six decades ago, and our spooks have since made Indonesia a top priority. Not that spying is a one-way street. General Hendropriyono, one of Indonesia’s own former intelligence chiefs, boasted on Australian TV in 2004 about how Indonesia regularly bugs Australian politicians, and expects the same in reverse.

In fairness to the Indonesians, the latest revelations do play into their sense of nationalism, which reflects an atavistic resentment against western interference. Seasoned Australian diplomats and political figures have recognised that among people who have had to fight for their independence, anti-colonialism is an emotion deeply and sincerely felt — something which touches their hearts more than minds. Not much has changed since those heady days of decolonisation in the 1940s.

When Canberra accommodates Jakarta’s sensitivities and respects its territorial sovereignty by, for instance, refusing to back independence movements, critics denounce the policy as appeasement. But Australia gains substantially from a close and effective relationship with its northern neighbour in ways that many locals don’t appreciate. After all, Indonesian help is required to stop people-smuggling and illegal fishing, fight terrorism and prevent drug shipments to the Antipodes. And problems in the archipelago’s busy sea lanes could interfere with Australia’s merchant and naval shipping.Any deterioration in this critical relationship damages the national interest.

So where does this leave the diplomatic stand-off? Calls for Mr Abbott to apologise and atone for Australia’s spying sins are escalating, but they are fraught with danger. An apology would damage the age-old principle of neither confirm nor deny. If the government agreed to sweeping restrictions on the scopes of intelligence activities, Australia would have let Edward Snowden and his collaborator Glenn Greenwald set its security policy, compounding the damage already done. And if Mr Greenwald’s newspaper, The Guardian, reveals more acts of espionage, it would lead to calls for more apologies from Mr Abbott and his Foreign Minister Julie Bishop, neither of whom was running Australian foreign policy in 2009 when the phone-tapping took place.

Limiting the damage to the Australian credibility is a test of Mr Abbott’s skills as a statesman. His twin imperatives will be to continue to protect the national interest steadfastly while allowing, somehow or other, the Indonesians and their President to save some face — an age-old Confucian/Buddhist principle, and a delicate diplomatic dance. Perhaps there is not much Mr Abbott can do except pursue a policy of benign calm and detachment until the poisoned atmosphere of the spy revelations has passed.