European markets, euro close flat as Cyprus bailout tests nerves

REUTERS

LONDON

EUROPEAN shares and the euro were flat on Tuesday, losing early gains as investors fretted that Cyprus’s raid on bank deposits could become the template for future eurozone bailouts.

Wall Street was expected to see a rebound from Monday’s losses, meanwhile, with a flurry of data expected to trump eurozone concerns by supporting hopes of a gradual US recovery.

Banks in Cyprus remain closed following the country’s 10 billion euro bailout agreed at the weekend, but comments from Jeroen Dijsselbloem, the new head of the Eurogroup of eurozone finance ministers, have stripped investors of the appetite for the kind of rebound that has followed other rescue deals.

Dijsselbloem said on Monday that the tactic used in Cyprus of getting wealthier savers and uninsured bondholders to bear heavy losses represented a new template for resolving regional banking problems.

After a choppy morning, top European shares .FTEU3 and MSCI’s index of world shares, which tracks 6000 stocks in 45 countries, were both flat on the day ahead of the Wall Street restart.

Investors continue to weigh the possibility that the eurozone crisis could escalate if savers in other debtstrained countries such as Spain and Italy pull money out of their own banks as a precaution following the grab on deposits in Cyprus.

“Dijsselbloem comment’s will stay the focus of markets,” said ABN Amro economist Joost Beaumont.

“Markets are recovering a little bit, and with the ECB (European Central Bank) now the lender of last resort it is hard to see a return to the depths of the crisis, but it is difficult to see a sharp rebound.” By 8:45 a.m. EDT, Paris’s CAC-40 was leading the way with gains of 0.6 percent.

London’s FTSE 100 and Frankfurt’s DAX were up 0.2 percent, though fears of tough conditions being attached to future bailouts were being felt in Madrid, where the IBEX fell 1.5 percent.

The decision to seize savings in Cyprus, as well as impose capital controls to prevent mass withdrawals once banks do reopen, has added a new dimension to the eurozone’s three year-long crisis.

Top ECB policymaker Benoit Coeure tried to assuage the concerns caused by Dijsselbloem’s comments, stressing the banking crisis in Cyprus was a unique case.

“I think Dijsselbloem was wrong to say what he said.

The Cyprus experience is not a model for the rest of Europe because the situation had reached a level which cannot be compared with any other country,” Coeure said in a radio interview.

Earlier, shares in Asia had edged lower but Wall Street was expected to rebound by around 0.2 percent as a 5.7 percent climb in durable goods orders in February got a busy day of US data off to positive start.

Economists polled by Reuters had expected orders to rise 3.8 percent after a 4.9 percent fall in January.

Investors in the bond and oil markets remained cautious.

Safe-haven German government bonds held near highs hit the previous session, while Brent crude dipped back to $108 a barrel, near last week’s three-month low.

Alongside the fallout from Cyprus, eurozone investors are also facing a lengthy spell of political uncertainty in Italy and an increasing divergence between strong European economies like Germany and its struggling neighbors.

French consumer confidence underscored the last of those worries, falling more than expected in March as worries about surging unemployment mounted.

Having tumbled to a fourmonth low on Monday following Dijsselbloem’s comments, the euro remained weak at $1.2860 against the dollar. Measured against a basket of currencies, the dollar was also little changed.

The euro has largely held its ground during the recent turmoil in Cyprus, but the likelihood of depositors being hit in future bank bailouts could drive it lower, analysts say.

“The developments yesterday were quite negative for the euro as it looks to be a bit of a change in policy approach within Europe with respect to bailouts. They seem to be putting the emphasis onto investors rather than taxpayers,” said Ian Stannard, head of European FX strategy at Morgan Stanley.

“That is going to keep the euro under pressure as it could well deter foreign investors from returning to peripheral European assets.” Gold, which typically benefits from economic uncertainty and has rallied during the Cyprus turmoil, fell back below $1,600 an ounce.

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