Cyprus: just what Osborne needed ahead of Budget day

Everything was going along just swimmingly before a little island in the Mediterranean reminded us there are still some pretty nasty problems out there.

A controversial bailout package in Cyprus announced over the weekend sent the FTSE plummeting from a five-year high and had similar impact on the euro.

The panic was triggered by news Cyprus would impose a tax of up to 10% on savers in order to meet the strict demands imposed on the island as part of the eurozone's €10 billion bailout package.

The tax sparked a run on the nation's banks as people rushed to withdraw their savings.

'The Cyprus bailout looks to me like further evidence of politicians and central banks supremacy over markets, said David Jane of Darwin Investment Managers. 'They don’t feel any hesitation in ensuring the transfer of wealth from savers to borrowers (the government).'

Julian Jessop, chief global economist at Capital Economics, added: 'Far-reaching financial crises often have small beginnings and wars have been started over less. What’s more, if the rest of the EU is unwilling to cut a better deal for such a small economy at minimal cost, what chance is there for the bigger ones?'

The fear is that the move could spark a run on banks in other eurozone countries.

It could also have severe implications for bondholders. London & Capital chief investment officer, Pau Morilla-Giner underlined how: 'Essentially, senior bondholders and large depositors have been helped at the cost of smaller locals.  

'At first glance, the primary aim is to hold the European banking sector together. However, inflicting costs on small depositors might be both incredibly unpopular and risky, as it furthers the erosion of bondholder protection at European banks. The move blurs the capital structure of banks, which is never positive.'

And with the Budget set for Wednesday in the UK, the latest crisis could be seen as strong justification for UK chancellor George Osborne to pursue his strict austerity programme, which came under heavy criticism after the nation lost its AAA-rating last month.