GLOBAL MARKETS-Shares, euro retreat as Cyprus euphoria fades

Mon Mar 25, 2013 3:12pm EDT

* Shares, euro pare initial gains after Cyprus gets bailout
    * Euro zone faces tough banking regime after deal - official
    * Safe-haven assets pare losses to rise on tough precedent

    By Herbert Lash
    NEW YORK, March 25 (Reuters) - Global equity markets and the
euro retreated on Monday after a senior euro-zone official said
the Cyprus bailout reached earlier could be used to shape other
regional banking problems by shifting more risk to depositors
and stakeholders.
    The Cyprus rescue forced depositors and bank bondholders to
bear losses, a deal that could become a template for future bank
restructurings in the euro zone, said Dutch Finance Minister
Jeroen Dijsselbloem. 
    "What we've done last night is what I call pushing back the
risks," Dijsselbloem, who heads the Eurogroup of euro-zone
finance ministers, told Reuters and the Financial Times.
    Cypriot policymakers reached an eleventh-hour deal with the
European Union, the European Central Bank and the International
Monetary Fund to shut down its second-largest bank in return for
10 billion euros ($13 billion). 
    While the bailout will avert a collapse of the Cypriot
banking system and keep Cyprus within the euro zone, the
agreement set a painful precedent for the region.
    Wall Street initially opened higher and the Dow Jones
industrial average reached another record intraday high, but
stocks retreated in morning trade, helping pull European equity
markets lower. 
    Italian blue-chips extended losses with traders citing
speculation of a possible downgrade of Italy's sovereign debt by
rating agency Moody's. The benchmark FTSE MIB
 equity index for Italy closed down 2.5 percent.
    The pan-European FTSEurofirst 300 index slipped
down 0.3 percent to end at 1,186.45, having risen as much as 1
percent earlier in the session.
    "The critical issue remains that of precedent for larger
Eurozone countries, and the way in which the Cyprus situation
has been managed does not seem to inspire a great deal of
confidence," said Ilya Spivak, a currency strategist at DailyFX
in New York.
    The Dow Jones industrial average was down 54.22
points, or 0.37 percent, at 14,457.81. The Standard & Poor's 500
Index  was down 4.21 points, or 0.27 percent, at
1,552.68. The Nasdaq Composite Index  was down 7.53
points, or 0.23 percent, at 3,237.47.
    Earlier, the Dow had climbed as high as 14,563.75, setting
another lifetime intraday high, and the S&P 500 touched a
session high that was within a fraction of a point of its 2007
record closing high.
    MSCI's all-country world equity index fell
0.29 percent to 357.72.
    The euro fell as low as $1.2830 and last traded at
$1.2864, down 0.92 percent for the day, according to Reuters
    The bailout was initially hailed by investors who had feared
Cyprus might default. However, the deal will inflict heavy
losses on depositors, including wealthy Russians, on deposits of
more than 100,000 euros, which are not guaranteed under EU law.
    Safe-haven assets such as U.S. Treasuries and German Bund
futures rebounded after initial losses.
    Depositors in Cypriot banking institutions must contend at
best with capital controls locking up their money, Spivak said.
At worst, they may lose as much as 40 percent of their holdings.
     "This raises an important question: Why should a depositor
in any Eurozone country similarly vulnerable to a banking crisis
expect to be unscathed if a Cyprus-like calamity were to befall
them," Spivak said. 
    The benchmark 10-year U.S. Treasury note also
pared losses, rising 4/32 in price to yield 1.9111 percent.
    Bund futures were up 39 ticks on the day at 144.76,
having fallen as low as 143.91 earlier in the session.
    Oil prices in London rose in choppy trade, with Brent crude 
 rising 38 cents to $108.04 a barrel.
    U.S. crude prices remained higher. U.S. light sweet crude
oil rose $1.10 to settle at $94.81 a barrel.
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