Cyprus deposit tax rattles markets

Stocks around the world fell sharply today 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 per cent 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 per cent levy on deposits below USD 130,860 rising to 9.9 per cent 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 per cent at 6,423 while Germany's DAX fell 1.2 per cent to 7,944. The CAC-40 in France was 1.3 per cent lower at 7,945. Cyprus' stock exchange is closed for a bank holiday.

The euro was taking a pounding too, down 0.7 per cent at USD 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 USD 13 billion financial rescue from its partners in the eurozone and the International Monetary Fund.

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