MARKET COMMENT: Cyprus Bank-Deposit Levy Bruises Europe Stocks

    By Sara Sjolin

    LONDON (MarketWatch)--European stock markets staged broad-based losses on Monday, after a bailout proposal for Cyprus, including a controversial levy on bank deposits, stoked fears that other struggling countries would follow the same path.

    The Stoxx Europe 600 index lost 0.2% to close at 296.81.

    The losses mirrored a weak trading day in Asia along with softness for U.S. stocks, on the back of 10 billion euro ($12.9 billion) deal to bail out Cyprus announced over the weekend.

    U.S. stocks open sharply lower on Cyprus deposit tax.

    The bailout agreement came with an unprecedented levy on bank deposits, with depositors with more than EUR100,000 euros taxed at 9.9%, while those with less at 6.75%, marking the first time in the euro-zone crisis that depositors will lose money and raising fears such measures could spread to other struggling euro-zone nations.

    A vote on the bailout was reportedly pushed back a day, as President Nicos Anastasiades, who has been in parliamentary meetings in Nicosia, reportedly wants the terms of the deal amended.

    "Should depositors in Cyprus or other peripheral countries feel safe now? They may not. After all, deposit-guarantee schemes do not guarantee against a levy. Depositors may also have to factor in that the one-off levy could inspire national governments to do the same thing. So the risk of bank runs has just gone up," analysts at Danske Bank said in a note.

    ATMs in Cyprus were reportedly already running out of cash over the weekend, as depositors tried to avoid the tax.

    Stocks weren't trading in Cyprus due to a public holiday, with other southern European indexes taking some of the biggest hits.

    Italy's FTSE MIB index dropped 0.9% to 15,924.13, while Spain's IBEX 35 index lost 1.3% to 8,507.80.

    The yield on 10-year Spanish government bonds rose 6 basis points to 4.95%, while the yield on 10-year Italian paper gained 4 basis points to 4.63% according to electronic trading platform Tradeweb.

    Predrag Dukic, senior equity sales trader at CM Capital Markets in Madrid, said that the Cypriot deposit tax raised fears that Spain could be next in line to implement the same measures.

    "It's a concern obviously and it has set a precedent now. If it happened to Cyprus why shouldn't it happen to us?" he said.

    "But at the same time, if we're reasonable, I can't see another bailout of the banks happening at the moment because they have already been bailed out. But we don't know what would happen in a year's time and the banks still have lots of toxic assets they need to clear from their balance sheets and we cannot rule out other provisions," he added.

    Both the Spanish index and the broader European stock market opened in deep red territory, but pared losses throughout the day. Moves that Dukic said illustrated that this a good way to buy into dips.

    "We could probably see a continuation of the recent rally," he said.

    "But it's also difficult to envisage that we won't have a correction and there are worries that this could be the trigger for that correction," he added.

    Among stocks adding pressure, European banks posted some of the biggest losses, with shares of Italy's UniCredit SpA down 3.6%, France's Societe Generale SA 3.3% lower and Banco de Sabadell SA off 4.5% in Madrid.

    France's CAC 40 index shaved off 0.5% to 3,825.47, Germany's DAX 30 index erased 0.4% to 8,010.70 and the U.K.'s FTSE 100 index lost 0.5% to 6,457.92.

    In the U.K., mining firms were also on the decline, as most metals prices were lower. Shares of Anglo American PLC dropped 1% and Rio Tinto PLC shaved off 1.1%.

    On a more upbeat note, shares of Marks & Spencer Group PLC gained 6.9% after The Sunday Times reported that a Qatar wealth fund was considering a bid for the U.K. retailer. A source close to the fund, however, later denied that a bid is on the way, according to news reports. A representative from Marks & Spencer declined to comment.

    Elsewhere, shares of Ericsson LM slipped 2.2% and STMicroelectronics NV jumped 5.2% after the two companies agreed to split their unprofitable joint venture ST-Ericsson.

    Shares of insulin maker Novo Nordisk AS fell 3.9%, as J.P. Morgan Cazenove cut the firm to underweight from neutral.

    Write to Sara Sjolin at