Global stocks fell sharply when the markets opened Monday after a decision by Cyprus to tax its citizens' bank deposits to pay for part of its bailout.
Euro zone countries and international creditors imposed a levy on all deposits in the island nation's banks as a condition for a 10-billion-euro ($13 billion) bailout.
Under the deal, a 6.75 percent levy will be placed on deposits below 100,000 euros ($130,860), rising to 9.9 percent on those above.
The news reportedly sent Cypriots scrambling to ATMs to withdraw cash, while also raising fears of a bank run in the wider euro zone, particularly in the most financially troubled countries, such as Greece and Spain, which are facing their own bailout deals.
Agence France-Presse quoted CMC Markets analyst Michael Hewson as saying:
"If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job."
The Associated Press noted that depositors had been spared amid the European debt crisis.
European shares traded sharply lower, with Spain's IBEX down 1.74 percent and Italy's MIB down 2 percent.
Asian equity markets took a hit, with Japan's benchmark Nikkei 225 index falling 2.7 percent and Hong Kong's Hang Seng dropping 2.1 per cent.
Meanwhile, the yen — considered a safe-haven currency — soared.
But nervous investors stripped almost $30 billion from the value of Australia's stock market. Australia's S&P/ASX 200 fell 2.7 and 2.1 percent. In Europe, the FTSE 100 index of leading British shares was down 1 percent and Germany’s DAX 1.2 percent. The CAC-40 in France was 1.3 percent lower.
Cyprus’ stock exchange is closed for a bank holiday.
The Australian cited Pengana Capital fund manager Tim Schroeders as saying that while Cyprus was only a small nation — representing around 0.2 percent of the combined output of the 17 European Union countries that use the euro — investors were concerned about a knock-on effect.
The AP quoted Gary Jenkins, managing director of Swordfish Research, as saying:
"In the medium term the decision taken regarding the loss on bank deposits could have major ramifications for the euro zone if the European debt crisis re-escalates. What I find most surprising is that they are prepared to take such a major gamble to save such a small amount of money."