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.
Geir Moulson in Berlin contributed to this report.
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