While you were sleeping Cyprus' unpalatable precedent

Tuesday 26th March 2013

Initial optimism over the agreement on a financial rescue for Cyprus turned to concern about the increased exposure of investors and depositors to banking losses in the euro zone.

Following earlier EU assurances that the Cyprus model of taxing depositors to help fund the nation's bailout would not be applied elsewhere, Eurogroup president Jeroen Dijsselbloem today told Reuters and the Financial Times that it could provide a template for dealing with bank trouble elsewhere.

Under the Cyprus 10-billion-euro rescue needed to avoid bankruptcy, the nation's No. 2 bank will be closed, with uninsured depositors picking up the tab on its losses.

"Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem," Dijsselbloem said. "We're going to push them back."

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'," Dijsselbloem said. "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

In afternoon trading in New York, the Dow Jones Industrial Average dropped 0.68 percent, while the Standard & Poor's 500 Index shed 0.34 percent, and the Nasdaq Composite Index declined 0.58 percent.

Europe's Stoxx 600 Index finished the session with a 0.3 percent slide from the previous close. The euro shed 1.1 percent against the US dollar, and lost 1.6 percent against the Japanese yen.

Italy's FTSE MIB fell 2.5 percent. The nation's bank shares dropped, sending those of Intesa Sanpaolo, Banco Popolare and UniCredit more than 5.5 percent lower.

"The Cyprus deal removed some of the tail risk regarding a messy default and exit from the euro zone, but a dangerous precedent of seizing bank deposits was set and Dijsselbloem's comments solidified concerns about future bailouts," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington DC, told Reuters.

"A depositor in an Italian or Spanish bank right now is likely to be reconsidering their capital allocations as well as those with counter-party risk in shaky euro zone countries," he said.

Shares of Dell gained, last up 2.9 percent, after the company said it received proposals from Blackstone Group and Carl Icahn that may be superior to Michael Dell's buyout plan. While they filed separate proposals, Icahn said he was talking with Blackstone about a joint bid.

There also was good news for investors in a 17-year-old British boy who has sold the Summly mobile app he created to Yahoo for at least 20 million pounds. The app provides summaries of news articles for users. Yahoo plans to eliminate the app and incorporate the technology into several of its own products.

BusinessDesk.co.nz

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