Cyprus bailout has sent stocks across the world crashing down and led to a rise in the borrowing costs. The UK stock market followed other European stock markets lower when trading began in London, falling 1.6% in the first few minutes to 6,390, as investors tried to absorb the impact of this bailout. While Asian market was first to succumb to a fall with the Nikkei in Japan closing 2.7% lower while the Hang Seng lost 2%, the Spanish IBEX lost 2.3% on opening and the MIB in Italy was 2.2% down.
Banking stock bore the brunt of the losses as European Union (EU) and International Monetary Fund (IMF) demanded that in return for 10 billion euros (£8.56bn), Cyprus will impose a tax on savings deposits. Although the move is yet to be fully agreed upon by the local government, it increased the fear among investors in the eurozone, who saw Cyprus bailout as distinctively different from previous aid packages which raised the prospect of either direct exposure or a knock-on effect.
Gold, which is seen as a safe investment during volatile times, rose above $1,600 (£1,058) for the first time in more than two weeks. Despite assurances from European officials that Cyprus is ‘exceptional’ and the measures are ‘unique’, the Cyprus bailout has driven investors to demand higher returns to hold risky assets.
The turmoil in Cyprus helped the pound recover some lost ground on the euro as sterling gained 1.2p on the single currency. There was also a positive implication for the cost of servicing the country’s sovereign debt as bond yields tumbled, though the benchmark 10-year debt costs rose sharply for nations such as Spain and Portugal which saw increases of more than 4%. While the yield on Spain’s 10-year government bond jumped 17 basis points to 5.098%, yields on 10-year Italian debt rose 13bp to 4.736%.