MercoPress. South Atlantic News Agency

Cyprus bailout conditions trigger fears of Euro debt crisis escalation and run on banks

Cypriots lining up to try and recover their funds and deposits

Asian markets have dipped after Cyprus bailout plans triggered fears of an escalation of the Euro zone debt crisis. The EU and IMF want all bank customers to pay a levy in return for a bailout worth 10bn Euros and although the plan is yet to be finalised, the news of the deal caused a rush to the cash machines in Cyprus as people tried to withdraw money.

Japan's Nikkei 225 index and Hong Kong's Hang Seng fell 2%, while Australia's ASX 200 dipped 1.4%. Analysts said that investors were sceptical about how the developments in Cyprus may affect other bigger Euro-zone economies which may also need bailout funds in the future.

The big fear being that, if approved, the plan may set precedence for those countries.

“There will certainly be confusion in Cyprus and investors looking just at headlines may fret about its case becoming a model,” said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

Meanwhile the Euro fell to its lowest level this year, while stocks, oil and copper slumped while Yen, gold and Treasuries climbed.

The Euro dropped 1.4% to 1.2893 and the Yen gained 0.5% to 94.76 per dollar in mid morning Tokyo. Oil also fell 1.3% and copper lost 1.8%, the most since November. Gold advanced as much as 1.1%. US Treasury 10-year yields headed for their biggest drop in three weeks.

Euro finance ministers reached an agreement on March 16 forcing depositors in Cypriot banks to share in the cost of the latest euro-zone bailout. While Cyprus accounts for less than half a percent of the 17-nation Euro economy, the concern is that the one-time tax on accounts could trigger bank runs across Europe and further destabilize the financial system.

“More contagion fears will spread through investors and it will encourage depositors in the European periphery to move their funds to a safer place, either under the pillow or to Germany,” said Mark Bayley, a Sydney-based credit strategist with advisory company Aquasia Ltd. “This is essentially a bai-in of depositors and sets a dangerous precedent”.

Cypriot President Nicos Anastasiades appealed to lawmakers in Nicosia to ratify the levy, which would raise 5.8 billion Euros. Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere.