Cyprus bailout deposit tax rattles markets

Stocks fall sharply after Cyprus proposal to tax deposits sparks renewed debt crisis fears

Associated Press
Asia stocks bounce back after Cyprus scare
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In this image taken Saturday, March 16, 2013, people queue to use an ATM machine outside of Bank of Cyprus branch in southern port city of Limassol, Saturday, March 16, 2013. Many rushed to cooperative banks which are open Saturdays in Cyprus after learning that the terms of a bailout deal that the cash-strapped country hammered out with international lenders includes a one-time levy on bank deposits. The move, decided in an extraordinary meeting of the finance ministers of the 17-nation eurozone in the early hours Saturday, is a major departure from established policies. Analysts have warned that making depositors take a hit threatens to undermine investors' confidence in other weaker eurozone economies and might possibly lead to bank runs. (AP Photo/Pavlos Vrionides)

LONDON (AP) -- Stocks around the world and the euro fell sharply Monday as investors fretted over a plan to tax depositors in Cypriot banks as a way to partly fund a bailout of the Mediterranean island nation.

Financial stocks bore the brunt of the selling in European stock markets, with France's Societe Generale down 5 percent and Italy's UniCredit 4 percent lower, as investors worried about the implications of the Cyprus bailout.

Since the European debt crisis began in late 2009, savers have been spared. But the bailout of Cyprus, agreed to on Saturday, foresees the government seizing 6.75 percent of deposits below €100,000 ($130,860), rising up to 9.9 percent on those above €100,000. That signals a huge policy shift for the embattled eurozone.

Now investors are worried that savers will start taking their money out of banks across Europe — just like Cyprus residents did on a weekend ATM bank run.

"If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job," said Michael Hewson, senior market analyst at CMC Markets.

In Europe, the FTSE 100 index of top British shares fell 0.5 percent to 6,461 while Germany's DAX was 0.9 percent lower at 3,816. The CAC-40 in France dropped 0.7 percent to 3,817. Cyprus' main index was closed for a public holiday and the country shut down the banks until Thursday so Parliament can vote on the bailout.

The euro was also suffering, down 0.7 percent at $1.2925.

The Cypriot Parliament has to back the proposal for it to pass, and lawmakers have called it an unfair blow to small savers, since up until now deposits around the eurozone have been guaranteed up to the €100,000 level. The vote was postponed for a second time with the Parliament speaker saying it will now take place Tuesday.

One new proposal would make the tax more graduated: placing a one-time 3 percent levy on deposits below €100,000, rising to 15 percent for those above €500,000.

"The bottom line is that it's very finely balanced and the success of the vote will depend on what tax breakdown goes before Parliament," said Adam Cole, an analyst at RBC Capital Markets.

If it backs the levy, then Cyprus would be eligible for a €10 billion ($13 billion) financial rescue from its partners in the eurozone and the International Monetary Fund. If it doesn't back the deal, then the country of just a million people faces bankruptcy and potentially an exit from the euro — a development that could have huge ramifications in global financial markets.

German finance minister Wolfgang Schaeuble said a "no" vote by Cypriot lawmakers would devastate the country.

"Then the Cypriot banks will no longer be solvent, and Cyprus will be in a very difficult situation," said Schaeuble.

Cyprus' banking sector is about eight times the size of the economy and has been accused of being a hub for money-laundering, particularly from Russia. That's why many European officials wanted to have the banks' depositors involved in the cost of the bailout.

The uncertainty over Cyprus weighed on sentiment around the world, though the selling pressure was eased through the U.S. trading session.

In the U.S., the Dow Jones industrial average was 0.2 percent lower at 14,477 while the broader S&P 500 index fell 0.5 percent to 1,553.

Earlier in Asia, Japan's Nikkei 225 index slid 2.7 percent to 12,220.63, while Hong Kong's Hang Seng dropped 2 percent to 22,082.83.

Oil prices trimmed their earlier losses, with the benchmark New York rate 25 cents lower at $93.20 a barrel.

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