Business

Isle be damned! Cyprus ‘fix’ sinks marts globally

Cyprus never seemed so close to Wall Street.

Fears that Europe’s relatively small $13 billion bailout of the Cypriot banking system could be used as a template for wobbly banks in other weak euro countries sparked a pan-Atlantic stock selloff yesterday.

Major markets across the US and Europe saw a sharp selloff after government leaders in Cyprus agreed to close two of its largest banks and finance the bailout of other financial institutions on the backs of large depositors and bondholders of the failed banks.

Account balances over the $130,000 insurance limit will be largely wiped out while senior bondholders of those banks will take a drastic haircut.

The deal will give depositors and bondholders across Cyprus and Europe pause — and could lead to a run on some banks.

“Look, where you take the risks, you must deal with them, and if you can’t deal with them, you shouldn’t have taken them on, and the consequence might be that it is end of story,” Jeroen Dijsselbloem, head of the Eurozone’s finance ministers, told the Financial Times in an interview about the bailout.

”That’s an approach that I think we, now that we are out of the heat of the crisis, should consequently take,” he said.

Jittery investors sent the Dow Jones industrial average down 0.8 percent yesterday, to 14,395, before recovering in the afternoon to close at 14,447.75.

The S&P 500 closed down 0.3 percent at 1551.69.

Previously, the Eurozone officials had promised that the bailout conditions in Cyprus would be unique.

But that tune seemed to change yesterday.

European leaders like Germany’s Angela Merkel had been reluctant to place the burden for Cyprus’ bad banks on her taxpayers, in part because the small island’s troubled banks have a reputation for attracting money-launderers, mainly from Russia.

Stocks edged back up again slightly after Dijsselbloem backtracked on his earlier comments, calling Cyprus a “specific case with exceptional challenges.”

“Had he [Dijsselbloem] not said every case would be different, this would have caused chaos,” said Manish Bangard, equity strategist with UBS. “If this is going to be a template for anything else, people would rather just keep their money under the mattress.”

The country still risks a run on banks when they re-open Thursday, experts said. By then, they will have been closed for close to two weeks as officials attempted to hash out a rescue.