Shares, euro retreat as Cyprus deal stirs unease

NEW YORK (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 is forcing 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 11th-hour deal with the European Union, the European Central Bank and the International Monetary Fund to shut down the country’s second largest bank in return for $13 billion in rescue funds.

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.

Dijsselbloem later said in a statement that rescue plans are tailor-made for each situation and no models or templates are used.

The euro slid more than 1 percent against the dollar and hit a four-month low, after having initially risen on the Cyprus deal.

“The critical issue remains that of precedent for larger euro zone 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.

Equity markets moved similarly to the euro, rising initially on Cyprus’s rescue, only to then fall as the details of the deal stirred fears.

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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.

The Dow Jones industrial average set another record intraday high and the S&P 500 index rose to be less than a point away from its record close before quickly retreating, helping to 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 .FTMIB equity index for Italy closed down 2.5 percent.

The pan-European FTSEurofirst 300 index .FTEU3 closed down 0.3 percent to end at 1,186.45, having risen as much as 1 percent earlier in the session.

The Dow Jones industrial average .DJI closed down 64.28 points, or 0.44 percent, at 14,447.75. The Standard & Poor's 500 Index .SPX fell 5.20 points, or 0.33 percent, at 1,551.69. The Nasdaq Composite Index .IXIC slid 9.70 points, or 0.30 percent, at 3,235.30.

MSCI's all-country world equity index .MIWD00000PUS fell 0.27 percent to 357.78.

The euro fell as low as $1.2830 and last traded at $1.2856, down 0.98 percent for the day, according to Reuters data.

Safe-haven assets such as U.S. Treasuries and German Bund futures rebounded after early losses.

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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 euro zone 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 reversed losses, rising 2/32 in price to yield 1.9181 percent.

Bund futures were up 36 ticks on the day at 144.73, having fallen as low as 143.91 earlier in the session.

Oil prices in London rose in choppy trade, with Brent crude rising 51 cents to settle at $108.17 a barrel.

U.S. crude prices remained higher. U.S. light sweet crude oil rose $1.10 to settle at $94.81 a barrel.

U.S. gold futures for April delivery settled down $1.60 at $1,604.50 an ounce.

Additional reporting by Marc Jones in London, Julie Haviv in New York; Editing by Chizu Nomiyama, Jan Paschal and Leslie Adler