* Shares rise, bonds fall as Cyprus gets bailout
* Uninsured depositors inflicted with heavy losses
* Cyprus deal could set precedent within euro zone
* Euro momentum wanes, but holds above $1.30
By Marc Jones
LONDON, March 25 European shares, the euro and
oil rose, while safe-haven German government bonds and gold fell
on Monday, after Cyprus agreed a bailout to save its banking
system and keep it in the euro.
In the early hours of Monday morning Cypriot policy-makers
reached a deal with the European Union, the European Central
Bank and the International Monetary Fund to shut down its second
largest bank and inflict heavy losses on uninsured depositors,
including wealthy Russians, in return for a 10 billion euro ($13
Without the agreement the ECB said it would have cut off
emergency funds to the banks, a move that would have triggered a
meltdown of Cyprus's banking system and potentially pushed the
country out of the euro currency bloc.
Investors breathed a sigh of relief that although the move
to seize individuals' savings had introduced a new dimension to
the euro zone crisis, the problems had not been allowed to
Euro zone banking shares rallied as much as 2.4
percent at one point to lead a rally on global stock markets
that reached as far as Australia.
By 1115 GMT Europe's top shares were up just under
1 percent and had recouped most of last week's losses that were
due to concerns Cyprus's problems could impact other struggling
In the region's crisis-sensitive bond markets, the price of
German 10-year Bunds, which moves down as yields
go up, also fell as the deal brought relief to riskier assets.
"No one really wants to be seen as dropping a country out of
the euro zone. That's the signal from this deal," said Elwin de
Groot, senior market economist at Rabobank.
Ten-year Spanish government bond yields fell
4.1 basis points to 4.83 percent and the Italian equivalent
eased 5.3 bps to 4.47 percent, while gold a
traditional safe-haven similar to German Bunds, dropped to a
1-week low of $1,602 an ounce.
The Cyprus deal, however, was unlike previous peripheral
euro zone country bailouts, which have protected bank deposits.
The worry now for investors is that the decision to hit
savings will see individuals in other debt-strained countries
take the precautionary step of pulling money of their own banks,
starving them of already scarce funding.
The euro has largely held its ground during the turmoil in
Cyprus, it bounced back above $1.30 following the deal
although the momentum was waning as midday approached in Europe.
"A deal to avoid default was expected. But this sets a
dangerous precedent for the euro zone," said Peter Kinsella,
currency strategist at Commerzbank, who expects the euro to
weaken against the dollar.
"It is very worrying that expropriation of private sector
capital is taking place. It increases the risk of a bank run and
when it next happens it is unlikely that ECB policies of
(providing) back stop will work then."
Some equity market traders also said they expected risk
premiums, which had been falling before the situation in Cyprus
flared up, to rise again.
"I am wondering whether this slightly more moderate response
by the market is a reflection of the fact the trust (in euro
zone policy makers) is now gone," said Justin Haque, a broker at
Hobart Capital Markets, though he expected equity markets to
keep rising into the extended Easter bank holiday break.
"This week is a short week and the end of the quarter, so
there is going to be a massive amount of window dressing," he
The immediate reaction from most markets, however, was
relief that the euro zone had managed to douse the flames of the
latest fire to threaten the region's financial system.
Wall Street was expected to follow Europe and open higher
having been little changed last week. By 1115 GMT futures for
the S&P 500, Dow Jones and Nasdaq 100 were
up 0.3, 0.4, 0.6 percent respectively.
In the currency market, the dollar, was 0.5 percent
lower against a basket of major currencies, while the yen
, which tends to rise in times of financial market stress,
retreated broadly as the worries over Cyprus eased.
Market expectations that the Bank of Japan will unveil
aggressive monetary stimulus at its next policy meeting on April
3-4, the first under new BOJ Governor Haruhiko Kuroda, are also
expected to support the dollar against the yen in the near term.
Oil also joined in the rally in risk assets. Brent crude
rose 70 cents to above $108 as hopes that the avoidance
of more severe outcome in Cyprus could brighten the outlook for
a revival in demand.
"This is certainly very good for risk appetite overall and
that's going to have a positive impact across oil markets, so we
should see some positive sentiment reverberate through energy
markets overall, for at least the next 24 to 48 hours," said Ben
le Brun, an analyst at OptionsXpress in Sydney.