Cyprus bailout proposal of deposit tax rattles world markets

Stocks around the world fell sharply on Monday as investors fretted over a weekend plan to tax depositors in Cypriot banks as part of a bailout of the Mediterranean island nation.

Though Cyprus accounts for only 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 Euro 100,000 ($130,860) rising to 9.9 per cent on those above.

In Europe, the FTSE 100 index of leading British shares was down 0.8 per cent at 6,439 while Germany's DAX fell 1.1 per cent to 7,954. 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 $1.2954.

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 on Monday. If it backs the levy, then Cyprus would be eligible for a Euro 10 billion ($13 billion) financial rescue from its partners in the Eurozone and the International Monetary Fund.

German finance minister Wolfgang Schaeuble said on 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.

"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 per cent to 12,220.63, while Hong Kong's Hang Seng dropped 2 per cent to 22,082.83.

Wall Street was headed for a retreat at the open too, with Dow futures down 0.5 per cent and the broader S&P 500 futures 0.8 per cent lower.

Oil prices were under pressure, with the benchmark New York rate 94 cents lower at $92.51 a barrel.