| NEW YORK, March 18
NEW YORK, March 18 Cyprus' plan to seize
individuals' savings to avoid bankruptcy nudged bank borrowing
costs up on Monday as investors fretted whether it would
establish an unwelcome blueprint for euro zone leaders in
dealing with other troubled members of the shaky currency union.
The rise in interest rates in money markets, where banks
raise money for loans and investments, was most pronounced early
in the day. The squeeze eased a bit by the afternoon as Cypriot
officials worked to revise the plan, though it still knocked
Wall Street stocks 0.5 percent lower.
Initially they had proposed a 10 percent tax on all of the
island nation's bank deposits.
The worry for investors is that such a move could spur bank
runs in Cyprus and beyond, leading to a massive withdrawal of
money from the euro zone to perceived safe havens such as the
"With the latest Cypriot bailout package, European leaders
have opened a can of worms in that future bailouts may now
affect bank depositors," said David Keeble, global head of
interest rates strategy at Credit Agricole Corporate &
Investment Bank in New York.
In the early days of the 2008 financial crisis, money
markets effectively seized up and choked off a key source of
funding for banks and businesses. It took a massive rescue
effort by central banks to restore confidence in the market.
The posted rate for overnight wholesale dollar deposits
shot up 11 basis points from Friday to a mid-price of
0.26 percent, the highest level since July.
Also, interest rates on one-month commercial paper issued by
French and German banks to raise dollars edged up 1 basis point
to about 0.20 percent, while rates on their six-month commercial
paper rose 3 basis points to about 0.25 percent.
Finally, the costs for banks to pledge euro-denominated
assets in order to obtain dollars rose. The three-month interest
rate on this type of loan widened to negative
0.20 percentage point from negative 0.15 percentage point late
Friday, the biggest one-day move since late September. A
negative rate indicates that banks lending dollars sought more
compensation for their risk.
Still, the overall levels of interest rates for euro zone
banks remain near historic lows given the unprecedented support
from the European Central Banks, analysts said.
By late Monday, some key markets signaled that worries about
Cyprus sparking a contagion were overblown.
The spread between the two-year dollar interest rate swap
and two-year U.S. Treasury notes,
which widens when investors grow anxious about the global
banking system, initially grew to the widest level in five weeks
at 15.75 basis points in overnight trading from Sunday night
into Monday morning. By Monday afternoon, the gap narrowed to
within three-quarters of a basis point from late Friday's level.
The implications of a bank tax for risk assets such as
stocks was unclear.
"It's a very small blip right now," said Joe D'Angelo, head
of money markets in Prudential Fixed Income in Newark, New
D'Angelo and others said the contagion risk to euro zone
banks from the financial woes in Cyprus is small because of its
tiny economy and miniscule exposure of French and German banks
to the country.
Cyprus' economy is equivalent to $22 billion, or 0.2 percent
of the euro zone's. It is a tenth of the economy of its northern
neighbor Greece, which has received two rounds of bailouts.
Still, if investors perceive European leaders might widen
the use of a bank tax as a means to help a country stay solvent,
this could cause a bank run across the euro zone and snowball
into another global financial crisis, analysts said.
"If that's the play-book, people will have to rethink their
risk tolerance for this type of capital structure," said Lance
Pan, director of investment research and strategy at Capital
Advisors Group in Newton, Massachusetts.