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Monday 20:00 GMT. Global equities lost ground and the euro came under pressure as an initial sense of relief that Cyprus had reached agreement on a €10bn bailout turned to uncertainty amid concerns that the deal might turn out to be a model for resolving future banking crises in the region.
The agreement, which would force hefty losses on large deposits in the island’s two biggest banks and see capital controls imposed, had been expected to be a one-off deal for Cyprus.
But Jeroen Dijsselbloem, the chairman of the eurogroup of eurozone financial ministers, unsettled markets by saying the Cypriot rescue marked a watershed in how the region deals with failing banks.
European leaders were now committed to “pushing back the risks” of paying for bank bailouts from taxpayers to private investors, he said.
The situation subsequently turned even more uncertain amid reports that Mr Dijsselbloem had attempted to clarify his earlier comments by saying Cyprus was indeed a “specific case”, with “exceptional challenges.”
US equities pulled off their lowest levels of the day, although the S&P 500 still closed 0.3 per cent lower. The benchmark had earlier risen to within a whisker of its 2007 record closing high.
The FTSE All-World index was down 0.1 per cent while the FTSE Eurofirst 300 index closed 0.3 per cent lower, having earlier been up as much as 0.9 per cent. In Milan, the FTSE MIB index tumbled 2.5 per cent amid rumours of a possible agency downgrade to Italy’s sovereign debt.
In Tokyo, however, the Nikkei 225 jumped 1.7 per cent amid relief at the Cyprus deal.
The euro, meanwhile, was down 1 per cent against the dollar, having touched its highest level since the start of the Cyprus crisis during Asian trading. The single currency was 1.3 per cent lower against the yen.
Peripheral eurozone government bond prices also fell as the mood turned more cautious. Spain’s 10-year bond yield rose 10 basis points to 4.96 per cent, while its Italian equivalent added 5bp to 4.58 per cent.
By contrast, the 10-year German Bund yield fell 4bp to 1.34 per cent and the 10-year US Treasury yield was 1bp lower at 1.92 per cent.
Economists at Daiwa Capital Markets warned that the eurozone will have been widely bruised and scarred from the experience of the past ten days.
“Although it remains just about intact, one of its key features – the free movement of capital – is now severely deformed by the Cypriot capital controls,” Daiwa said.
“And events in Cyprus can only serve to provide a further drag on confidence and growth in the euro area as a whole at a time when both were already under severe pressure.”
Jonathan Loynes at Capital Economics added the episode had again demonstrated the ability of eurozone policy makers to allow very small problems – in relative financial terms – to push the currency union to the brink of disaster.
“Some of that no doubt reflects downright incompetence,” he said. “But the willingness of Germany and other core economies to allow ordinary peoples’ savings to be raided underlines their resistance to further bailouts for the southern economies, let alone to the full fiscal union many believe is vital to the euro’s future.”
Industrial commodities put in mixed performances, with Brent crude managing to rise 51 cents to $108.17 a barrel, although that was well off the day’s high of $109.07. But copper eased back to $7,620 a tonne in London from Friday’s close of $7,655.
Gold pared an early decline to trade 0.2 per cent lower at $1,604 an ounce.
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