Cyprus move to tax bank accounts jolts global markets

Markets from stocks to commodities were jolted on Monday after the Cyprus government on Saturday moved to impose a tax on bank accounts, as part of a €10-billion ($13 billion) European Union bailout plan.

The Cypriot parliament's decision to tax bank deposits follows a deal with European Union finance ministers to help Cyprus overcome its financial problems that have generally dogged the region as a whole.

The EU ministers, however, wanted Cyprus to chip in with its share of around $7.5 billion as part of the bailout package. To raise this amount, the Cyprus government imposed a levy of 6.75 per cent to 9.9 per cent on bank accounts, triggering anger and panic among investors.

Infuriated depositors emptied their accounts across Cyprus and other weaker euro zone economies.

The move also triggered worries that savers in other, larger, European countries could also start withdrawing funds from banks, causing a run on banks across euro zone.

Cyprus hardly accounts for 0.2 per cent of the euro zone's gross domestic product, but Brussels wants the tiny European nation to feel the pangs of the bailout.

Analysts expect the Cyprus government's move could trigger a run on banks.

On Monday, the euro tumbled and stock markets dived following the Cypriot parliament's vote to extract money from bank deposits for bailing out the economy.

Earlier, the Cyprus government had said it was working on a plan to soften the impact by taxing deposits above €100,000, rather than imposing a universal tax on bank deposits.

The government, however, says it has no other option left than go bankrupt.

The changing perception of European governments that savings and bank accounts of taxpayers are not sacrosanct unnerved investors who offloaded both savings and investments.

Markets fell across Europe and Asia. London's FTSE 100, Frankfurt's DAX and Paris's CAC 40 all fell between 1.5 and 2 per cent on opening. Moscow's MICEX also lost 2.4 per cent.

In Asia, the Japanese Nikkei and Hong Kong's Hang Seng fell nearly 3 per cent, while Singapore's Strait Times Index slipped over 0.90 per cent.

India's benchmark Sensex opened 160 points lower, recovered before slipping again and closed at 19246.07, down 134.36 points (-0.69 per cent) from the previous close.

The rupee too slipped against the dollar, euro and the pound sterling.

Gold, however, came unscathed gaining $4.97 in Singapore, where spot gold was quoted at $1,596.81 an ounce, while gold for April delivery ruled at $1,596.10.