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Stock markets rise as Cyprus deal eases crisis fears Stock markets fall despite Cyprus deal
(about 4 hours later)
European stock markets have risen after officials agreed a bailout deal for Cyprus following a week of uncertainty. European and US stock markets have fallen despite the agreement of a bailout deal for Cyprus.
The main markets in France and Germany were both up by about 1.5% in the first hours of trading. The euro was also up against other major currencies. Earlier, European markets had risen sharply following news of the deal, which was agreed late on Sunday.
The rises followed a rally in Asian shares earlier in the day. But comments by one European finance minister, suggesting that the Cyprus deal could form the template for future bailouts, damaged market sentiment.
Investors are hopeful that the deal struck between Cyprus, European authorities and the IMF will prevent the crisis escalating further. By 15:30 GMT, all major European markets had fallen into negative territory, joined by US stocks.
Cyprus will now get 10bn euros ($13bn; £8.5bn) in bailout funds to keep its banking system running and prevent it from being forced out of the eurozone. Earlier, hopes that the Cyprus deal would prevent the crisis spreading to the rest of the eurozone had boosted shares, following rises in the Asian markets.
The European Central Bank (ECB) had set a deadline of Monday to agree a deal. If this was not met, it would have cut crucial funding to Cyprus's two biggest banks. Cyprus will receive 10bn euros ($13bn; £8.5bn) in bailout funds, but has agreed to a major restructuring of its banks.
"We've put an end to the uncertainty that has affected Cyprus and the euro in recent days," said Dutch finance minister Jeroen Dijsselbloem, who chaired the key meeting of European finance ministers on Sunday night. Deposits in those banks above 100,000 euros are also likely to be used to pay for part of the bailout, with the Cypriot government suggesting that such account holders should expect to lose about 30% of their balances.
In Paris on Monday, the Cac 40 share index was up 1.7%, while Frankfurt's Dax index rose 1.3%. London's FTSE 100 index was also up in early trading. Despite the earlier share rises, markets in Europe and the US appeared to react negatively when Jeroen Dijsselbloem, the Dutch Finance Minister involved in the Cyprus negotiations, said the deal represented a new template for resolving future eurozone banking problems.
In Asia, stock markets in Japan, South Korea, Hong Kong and Australia closed up by between 0.5% and 1.7%. He also said other countries may have to restructure their banks.
Currency boost By late afternoon trading, the UK's FTSE 100 index was down 0.3%, while France's Cac had lost 1.1% and Germany's Dax had given up 0.5%. In the US, the main Dow Jones index was 0.4% lower.
Investors were particularly encouraged by the fact that the the new deal, unlike previous agreements, does not require the approval of the Cypriot parliament. The euro was also driven lower, falling to a six-week low against the pound. The euro was down 0.6% to 84.74 pence.
The uncertainty about the future of Cyprus in the euro was sparked when parliament rejected an original deal, which included a controversial bank levy, a week ago. Significant obstacles
Despite the Cypriot economy's relatively small size, many analysts had been concerned that the crisis would spread to the wider eurozone. The new deal for Cyprus, unlike previous agreements, does not require the approval of the Cypriot parliament.
There were fears the country's possible exit from the euro would trigger a loss of confidence across the single currency bloc, and prompt investors to withdraw from other troubled economies, such as Greece. The uncertainty over the future of Cyprus in the eurozone was sparked a week ago when its parliament rejected an earlier bailout deal, which also included a controversial bank levy.
News of the new agreement saw investors return to the euro, after it saw falls last week. Despite the Cypriot economy's relatively small size, many analysts had been concerned that the crisis would spread to the wider eurozone, had Cyprus been forced to give up the single currency.
The currency rose sharply against the dollar, the pound and the yen following the announcement, before falling back slightly. There were fears that the country's possible exit from the euro would trigger a loss of confidence across the single currency bloc, and prompt investors to withdraw from other troubled economies, such as Greece.
"This will likely limit the euro's downside, with those who shorted the euro covering their positions, and improve general risk sentiment," said Hiroshi Maeba, head of foreign exchange trading for UBS in Tokyo. However, while Cyprus is now likely to remain in the eurozone, the country still faces significant obstacles as it attempts to recover from the crisis.
Uncertainties remain The EU-IMF deal involves a massive restructuring of the Cypriot banking system, as well as austerity measures and tax increases.
Despite the relief on the markets, analysts warn that significant obstacles remain as Cyprus attempts to recover from the crisis.
The EU-IMF deal involves massive restructuring of the Cypriot banking system, as well as austerity measures and tax increases.
There has also been significant public anger in Cyprus at the intervention of European authorities, and the credibility of the Cypriot government has been questioned.There has also been significant public anger in Cyprus at the intervention of European authorities, and the credibility of the Cypriot government has been questioned.
The bank restructuring is also likely to mean that depositors with more than 100,000 euros are likely to lose a significant proportion of their money - possibly as much as 30-40%.
"We see a risk that Cyprus' sovereign debt burden post-bailout might not be sustainable, as the country is likely to enter a deep recession caused by the shrinkage of the banking sector and severe deleveraging," warned Reinhard Cluse, an economist at UBS."We see a risk that Cyprus' sovereign debt burden post-bailout might not be sustainable, as the country is likely to enter a deep recession caused by the shrinkage of the banking sector and severe deleveraging," warned Reinhard Cluse, an economist at UBS.