Stock markets fell sharply today on fears that an unprecedented levy on bank deposits in Cyprus will plunge Europe back into crisis.
The FTSE 100 Index, which has been trading at a five-year high above 6500 in recent days, slumped 100 points or 1.5%, while Japan’s Nikkei ended the session more than 2.5% lower. Banks were among the biggest fallers in London.
Traders are worried that the precedent set by the planned move could spark an exodus of capital from other fragile European economies and jeopardise the region’s recent tentative recovery.
Unlike the previous rescues for Greece, Portugal, Ireland, and Spanish banks, the proposed Cypriot bailout is the first one that dips into people’s savings to finance a bailout.
In exchange for €10bn in rescue money, there will be a one-time tax of 6.75% on all bank deposits under €100,000 and 9.9% over that amount.
The bailout package, which has still to be finalised, involves the International Monetary Fund, European Central Bank and European Union.
Michael Hewson, senior analyst at CMC Markets, said: “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.
“Not only is it in complete contravention of the deposit insurance rules agreed by all EU countries in October 2008, and an absolute PR disaster, but it opens up a Pandora’s box of all possibilities with respect to precedent and future measures in other EU countries that find themselves having to ask for help in the future.”
On Friday, the Dow Jones Industrial Average ended a 10-day winning streak, its longest in nearly 17 years.