Cyprus deal shock sends euro, shares tumbling

LONDON — The surprise decision by eurozone leaders to part-fund a rescue of Cyprus by taxing bank deposits sent shockwaves through financial markets yesterday, with shares, the euro and the bonds of its southern members all tumbling.

Reuters

The eurozone struck a deal on Saturday to hand Cyprus a bailout worth ₣10 billion ($13 billion), but defied warnings — including from the European Central Bank — and imposed a levy that will see those with cash in the island’s banks lose between 6,75% and 9,9% of their money.

Parliament in Cyprus was due to vote on the measure later yesterday and the government was looking at ways to reduce the impact on small savers.

Without the rescue Cyprus would have be unable to avoid a default. That would have undermined the promise that Greece’s writedown last year was a one-off, but the unprecedented move to hit depositors adds a radical new dimension to the crisis.

The response of investors was unambiguous as European markets re-opened for first time since the deal was announced.

Stock markets across the region lurched lower, the euro fell to a three-month low, while safe-haven assets such as gold and German government bonds jumped.

Economists were taken aback by the move, but some took the view that safety measures in place at the ECB should contain the fallout.
“Clearly this 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 three-year LTRO’s that can provide liquidity if needed, that the market will feel comfortable about when assessing the longer-term implications.”

Equity markets were underscoring the more immediate worries, however, and ay 0810 GMT the pan-European FTSEurofirst 300 .FTEU3 was down 1,2% after Asia indexes had also slumped.

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