Cyprus Bank-Deposit Tax Sends World Markets Tumbling

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cyprus bank bailout
(Pavlos Vrionides/AP) Customers line-up Saturday to use an ATM machine outside of Bank of Cyprus branch in southern port city of Limassol on Saturday.
By PAN PYLAS

LONDON -- Stocks around the world fell sharply Monday as investors gave their initial verdict to a weekend plan to tax depositors in Cypriot banks as part of a bailout of the Mediterranean island nation.

Though Cyprus only accounts for around 0.2 percent of the combined output of the 17 European Union countries that use the euro, the tax on depositors has stoked fears of bank runs in other troubled European economies.

Since the European debt crisis began in late 2009, savers have been spared. The bailout of Cyprus, agreed to early Saturday, foresees a 6.75 percent levy on deposits below €100,000 ($130,860) rising to 9.9 percent on those above.

"In the medium term the decision taken regarding the loss on bank deposits could have major ramifications for the eurozone if the European debt crisis re-escalates," said Gary Jenkins, managing director of Swordfish Research. "What I find most surprising is that they are prepared to take such a major gamble to save such a small amount of money."

In Europe, the FTSE 100 index of leading British shares was down 1 percent at 6,423 while Germany's DAX fell 1.2 percent to 7,944. The CAC-40 in France was 1.3 percent lower at 7,945. Cyprus' stock exchange is closed for a bank holiday.

The euro was taking a pounding too, down 0.7 percent at $1.2960.

People in Cyprus have reacted with fury to the news and the country's new president is apparently working out a new plan to be put to Parliament that will limit the hit on small depositors. Parliament is due to vote on the bailout later. 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.

German finance minister Wolfgang Schaeuble said Sunday that a no vote by Cypriot lawmakers would have huge repercussions in the country.

"Then the Cypriot banks will no longer be solvent, and Cyprus will be in a very difficult situation," said Schaeuble who insisted that every country involved in Europe's debt crisis is different. In the case of Cyprus, he said bank owners and investors had to participate in the rescue.

"It can't be done any other way if we want to avoid insolvency," he said.

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 reaction in the markets has been swift and largely negative and stocks around the world have taken a dive, along with the euro.

"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 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.

Wall Street was headed for a retreat at the open too, with Dow futures down 0.6 percent and the broader S&P 500 futures 1 percent lower.

Oil prices were under pressure, with the benchmark New York rate $1.21 lower at $92.24 a barrel.

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Geir Moulson in Berlin contributed to this report.


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jmnardihrt

Yep the DOW is down damn near 27 points ? Why do you post a headline that is simply not true ? What do they gain by doing it ? Perhaps the advertisers who you must sit through their ads pay and a story like : " Cyprus may bail out and the markets dont really give a hoot and stay at minimal losses " won't grab your eye and give you the opportunity to have to listen to an ad before the story ?

March 18 2013 at 1:42 PM Report abuse rate up rate down Reply
rkeeeballs

One little country put's the Euro heads in a tizzy ?.....Just how fragile is your alliance ?

March 18 2013 at 1:42 PM Report abuse rate up rate down Reply
rrusrjr2

'Hey, Holder,, this is exciting! check out how we can get at US accounts. my voting sheep will believe we are doing this to Benefit them. we will give them smart phones to make them think they are getting something for nothing.'

March 18 2013 at 1:07 PM Report abuse rate up rate down Reply
mdennish

The banks are a haven for organized crime and drug cartels but the small investor or saver will be penalized.

March 18 2013 at 11:05 AM Report abuse rate up rate down Reply
Jay and Monica

You mean they are going to tax the Russian mafia money being funneled through Cyprus? Gee, wonder what will happen... Sure they keep putting money in those banks... Leave the burden of the tax to fall on legitimate small investors.. Great plan.

March 18 2013 at 9:26 AM Report abuse rate up rate down Reply