THE euro zone's decision to part-fund a bailout of Cyprus by taxing bank deposits drove down shares, the euro and the bonds of its troubled sovereign debtors.
Hopes that the tactic will not be used elsewhere later
helped to contain financial market losses.
The bloc struck a deal on Saturday to hand Cyprus rescue
loans worth 10 billion euros ($13 billion), but defied warnings
- including from the European Central Bank - and imposed a levy
that would cost those with cash in the island's banks between
6.75 and 9.9 percent of their money.
Parliament in Cyprus put off a vote on the measure - which
has shaken depositors' confidence in banks across the continent
- until Tuesday, and with public anger at the deal widespread
the government said it was looking to reduce the losses for
The deal staved off a default which would have undermined
the promise that last year's Greek debt writedown was a one-off,
but the move to hit depositors takes the euro zone crisis into
The initial response of investors was unambiguous. European
shares followed Asian indexes to lurch lower, the euro fell to a
new three-month low, while safe-haven assets such as gold and
German government bonds jumped.
Italian and Spanish bond yields both jumped sharply,
reflecting fears about the weakness of these two euro zone
economies and the size of their debt burdens.
European shares had steadied at losses of around 0.6 percent
by 1300 GMT, having at one point been down as much as 1.4
percent. Wall Street opened lower but selling was limited.
Euro zone bank shares bore the brunt of the sell-off
on fears the decision could spark bank runs in other troubled
countries. They were down 3.6 percent ahead of the U.S. restart
and the cost of insuring the debt of even high-quality European
banks against default also rose sharply.
"If I were a saver, certainly in Spain or maybe Italy, I
think I'd be looking askance at these measures and think this
could yet happen to me," Peter Dixon, global financial economist
at Commerzbank said.
It was the worst session for European equities since last
month's inconclusive Italian elections. London's FTSE 100
, Frankfurt's DAX and Paris's CAC-40
were down 0.6, 1 and 1.2 percent respectively, leaving MSCI's
global share index down 0.8 percent.
CENTRAL BANK SUPPORT
However, some in the markets were drawing support from a
view that the safety measures put in place at the European
Central Bank should contain the fallout.
Besides, this week three of the world's biggest central
banks are expected to signal they plan to keep monetary policy
loose for the foreseeable future.
"Clearly this (Cyprus deal) is a negative development for
European assets but in the terms of contagion we think it is
quite limited," said Guillermo Felices, head euro asset
allocation at Barclays in London.
"There are tools - such as the ECB's OMT (bond buying
programme) and the option of more 3-year LTROs (ECB loans to
banks) that can provide liquidity if needed - that the market
will feel comfortable about when assessing the longer-term
Other analysts said shares are trading at historically lofty
levels - and therefore ripe for a pullback. Efforts by
policymakers to revise the Cyprus plan to spare small savers
from losses also supported the market.
The euro staged a slight recovery after dropping to a
new three-month low of $1.2882 in Asian trading. It was down 1
percent overall on the day but was flat for the European session
The dollar itself, which investors often head for
when tensions in Europe rise, gained 0.5 percent.
"Euro zone politicians will be at pains today to manage down
the danger of contagion to other markets. The euro will find a
little bit of support from that but markets will remain
jittery," said Jane Foley, senior currency strategist at
The euro zone's bond market has been the main lightening rod
of its troubles over the last three-years.
While Italian and Spanish bond
yields jumped, the widespread anxiety drove up German government
bonds, the traditional favourite of risk-adverse
European investors, and indiscriminately pushed up the cost of
insuring against a sovereign default in the euro zone's southern
In commodity markets, U.S. crude and Brent oil both tumbled,
with Brent futures $1.70 a barrel lower at $108.16 and
U.S. oil declined $1.10 to $92.35.
Gold, another safe-haven asset, meanwhile, saw its
biggest jump in a month as it rose to $1,608.30, its highest
level since late February.
"With what is going on in Cyprus right now, investors are
looking for some hedges and gold is benefiting from that, but it
is questionable how long it will last," Credit Suisse commodity
analyst Karim Cherif said.