Markets tense as Cyprus postpones levy vote

(Update) Stock markets recovered some ground this afternoon but banking stocks fell further, battered by the sell-off provoked by the bailout tax imposed on Cyprus' savers at the weekend.

The Dow Jones industrial average fell 36 points or 0.25% to 14,478 and the S&P 500 shed seven points or 0.5% to 1,553 three hours after Wall Street opened for trading.

Some calm was restored to European markets as Cyprus' parliament postponed a vote on the controversial deposit levy until tomorrow while the government worked on measures to soften the impact on smaller savers. However, turmoil could be unleashed if the parliament votes against the deal, pushing Cyprus into bankruptcy.

Reuters reported sources saying that banks will remain shut in Cyprus tomorrow, after today's public holiday, mollifying those who feared an imminent bank run could start in Cyprus and extend to the island's bigger neighbours in southern Europe. Other reports suggest banks could remain shut on Thursday as the hammers out a deal.

Schaeuble under fire

Investors continued to express incredulity at events, which appeared designed to worsen, rather than reduce, the risk of a eurozone break-up, but awaited developments. After steep falls earlier in the day local stock markets made some gains. The Ibex index in Spain closed down 1.8% at 8,459 while in Italy the FT MIB index ended the day 1.2% off at 15,861.

In Germany, where finance minister Wolfgan Schaeuble was forced on the defensive over his role in imposing the tough terms on Cyprus' population, the Dax fell 0.9% to 7,971. In France the Cac 40 slipped 0.7% to 3,816 with the FTSE Eurofirst 300 0.4% lower at 1,198.

No love from Russia

The international dimension of the row over the do-or-die ultimatum handed by the 'troika' group of lenders to Cyprus late on Friday grew as Russia criticised the deal. President Putin branded the levy as 'dangerous' and the country's finance minister said it could threaten a €2.5 billion loan to the island. Up to half of the €70 billion deposits in Cyprus are held by non-residents, mostly thought to be Russians.

Azad Zangana, European economist at Schroders, said Cyprus set a dangerous precedent for future bailouts of member states with problem banks. Although the economy represented only 0.5% of the eurozone, the Russian involvement and the recent discovery of gas reserves complicated the situations.

'Once natural gas extraction is underway, Cyprus will be energy independent, and have enough left over to pay for the recapitalisation of its banks. However, there was a risk that if a European deal could not be reached, then Cyprus could enter negotiations with external countries - namely Russia - that would be happy to accept future gas revenues in payment. For Europe, not only is it important to secure one of its member states, but also the significant reserves of natural gas,' said Zangana.

Approaching close the FTSE 100 traded 33 points lower or 0.5% down at 6,456 with financial stocks, such as Barclays, RBS and Prudential falling between 3.3% and 4.2%.

On currency markets the euro also steadied, tradiing 1% lower against the dollar at $1.295.

On commodity markets gold gained nearly 1% or over $15 an ounce to $1,607 while crude oil fell towards $109 a barrel.

For more on the Cyprus crisis continue reading this market report or read a comment piece by Paul Donovan of UBS and a Q&A: 'why does the Cyprus bailout mattter?'

Other news - AstraZeneca cuts 1,600 jobs

Away from the revived eurozone crisis, AstraZeneca (AZN.L) shares dipped 16p or 0.5% to £30.53 after it announced the loss of around 1,600 jobs from the overhaul of its R&D operations in the UK, US and Sweden. New chief executive Pascal Soriot said the restructuring would cost $1.4 billion (£925 million) but create annual savings of $190 million (£125 million) by 2016.

Housebuilder Berkeley (BKGH.L) gained 29p or 1.5% to £10.04 after confirming plans to return £568 million to shareholders by 2015.

Cyprus levy spooks markets; M&S soars

09.42: Investors have reacted with incredulity at European finance ministers' decision to impose a levy on Cyprus' depositors as a condition for bailing out the island's economy.

The move on Friday to force the Cypriot government to seize up to 9.9% of the island's deposits as part of a €10 billion (£8.5 billion) bailout has outraged the population and alarmed investors as it breaks European legal protection of deposits up to €100,000.

After a weekend in which Cypriots have emptied money from cash machines, the fear in the market is the bank levy could be repeated elsewhere in southern Europe, risking a destabilising run on the banks.

Stock markets in Italy plunged nearly 2% with the FT MIB index sliding 294 points to 15,750. In Spain the Ibex index declined 1.6% or 138 points to 8,481. In France and Germany the Cac 40 and German Dax fell around 1%, with the Euronext 100 index 6.6 points or 0.9% off at 716.

The FTSE 100 plunged 97 points to 6,393 in early trading after big falls in Asia Pacific and Australia overnight but settled at 0.8% or 50 points down at 6,440 as the morning wore on.

On currency markets the euro fell as low as $1.2888 before steadying around $1.2964.

Ahead of a vote in parliament today the Cypriot government is seeking to soften the blow on smaller savers and increase the 'haircut' for depositors with over €100,000 in its banks. The terms outlined on Friday would see deposits under that level hit with a 6.75% tax and those above paying 9.99%.

Ros Altmann, the independent pension consultant, commented: 'Have EU policymakers taken leave of their senses? For policymakers to insist that Cyprus confiscate smaller savers' bank deposits in order to save its banks make a mockery of depositor protection schemes everywhere and runs the risk of bank runs across Europe.'

European authorities insist the levy is an exceptional measure but investors worry it is part of a disturbing recent trend of reducing depositor and bond holder protection. They cite this year's nationalisation of SNC bank in the Netherlands and the cuts imposed on Anglo Irish bondholders last year.

The full impact of the levy in Cyrpus may not be felt until tomorrow as the Mediterranean island's banks are shut today for a public holiday.

Lee McDarby of Investec Corproate Treasury said: 'What is also clear is that there is as yet no standard approach of tackling the euro debt crisis, so European investors face uncertainty as the crisis continues to unfold.'

Mike van Dulken, head of research at Accendo Markets, said the lack of a bigger sell-off indicated markets were becoming 'increasingly thick skinned'. 'Hopefully, [the levy] is just another "Brussels stick' (like the Draghi backstop), which it hopes is big enough to scare but won't really have to use.'

In London financial stocks were among the biggest fallers, with fund manager Schroders (SDR.L), banks Barclays (BARC.L), Lloyds (LLOY.L), Royal Bank of Scotland (RBS.L), Standard Chartered (STAN.L) and insurer Prudential (PRU.L) falling between 2.5% and 3.4%.

Miners also fell with ENRC (ENRC.L) the biggest faller, down 4.7% or 16p at 330.5p.

Sage (SGE.L) recovered from a sharp opening fall of 3.4% with shares in the accounting software provider trading 6p or 1.8% lower at 336p.

Marks & Spencer (MKS.L) was easily the biggest riser in the FTSE 100. Its shares soared 26.6p or 7% higher at 399p after weekend reports that Qatar's sovereign wealth fund is trying to mount a £8 billion bid for the high street department store group.