LONDON -- Investors breathed a sigh of relief Monday after Cyprus clinched a bailout deal with international creditors that will prevent it becoming the first country to ditch the euro -- a prospect that could have worsened the crisis afflicting Europe's single currency.
In the early hours of Monday morning in Brussels, an agreement was reached in Brussels that capped one of the most tumultuous weeks since Europe's debt crisis started three and a half years ago.
In return for a 10 billion euros ($13 billion) bailout from its European partners and the International Monetary Fund, Cyprus agreed to drastically shrink its outsized banking sector, cut its budget, implement economic reforms and privatize state assets -- a cocktail of measures that mean the country's near-term economic prospects are bleak indeed.
The deal will allow the European Central Bank to continue providing liquidity to the remnants of Cyprus' banking system, thereby eliminating any short-term fears of bankruptcy.
Cyprus's side of the bargain is earmarked to raise 5.8 billion euros. To do so, the country's second-largest bank, Laiki, will be restructured and bond holders and savers with more than 100,000 euros deposited will have to take significant losses. Depositors in the biggest bank, the Bank of Cyprus, with over 100,000 euros will also bear a cost but those with savings up to 100,000 euros will be guaranteed in accordance with the EU's deposit insurance guarantee.
"Equities are enjoying a relief rally this morning as the imminent threat from Cyprus appears to have been abated, but where the markets go from here remains to be seen," said Mike McCudden, head of derivatives at Interactive Investor.
In Europe, the FTSE 100 index of leading British shares was up 0.8 per cent at 6,446 while Germany's DAX rose 1.1 per cent to 8,002. The CAC-40 in France was 1.2 per cent higher at 3,816. Italy's FTSE-MIB was the only major index to drop, trading 0.7 per cent lower, as political parties there still struggled to form a government.
On Wall Street, the Dow Jones industrial average was up 0.3 per cent at 14,551 while the broader S&P 500 index rose 0.5 per cent to 1,564.
The focus will likely remain on developments surrounding Cyprus for a while yet. In particular, investors will be interested to see if the level of bank withdrawals from the country's banks when they reopen. That's scheduled for Tuesday.
A longer-lasting concern is how the Cyprus deal plays out in other countries, notably those at the forefront of Europe's debt crisis. Will depositors look to reduce their holdings in Spain, Italy and Greece?
The hope among European policymakers is that their insistence that Cyprus was a one-off will prevent concerns spreading across Europe, in particular the countries at the forefront of the debt crisis.
"The absence of a deal could easily have translated into a full blown 'bank run' with contagion being transmitted to banking systems throughout southern Europe," said Neil MacKinnon, global macro strategist at VTB Capital.
The prospect of contagion to other countries remains despite the Cyprus deal, especially as the initial Cyprus bailout foresaw charges on all deposits, whatever the size. If another country gets into trouble, the prospect of depositors taking fright is real and that's weighed on the euro. After earlier hitting $1.30 in the aftermath of the bailout, the euro was pressured and was trading 0.2 per cent lower at $1.2920.
Earlier, investors in Asia had the first chance to respond to the Cypriot developments and there too the response in financial markets was of relief. Japan's Nikkei 225 index surged 1.7 per cent to 12,546.46 while South Korea's Kospi jumped 1.5 per cent to 1,977.67. Hong Kong's Hang Seng rose 0.6 per cent to 22,251.15.
However, mainland Chinese shares fell Monday, with the Shanghai Composite Index down 0.1 per cent at 2326.72 and the smaller Shenzhen Composite Index falling the same rate to 959.93.
Oil prices tracked equities higher, albeit modestly, with the benchmark New York rate a dollar at $94.71 per barrel.
Pamela Sampson in Bangkok contributed to this report
