The sharemarket suffered its biggest fall in more than three weeks yesterday and volatility soared as a controversial bank bailout plan in Cyprus threatened to reignite the European sovereign debt crisis.
Cyprus proposed a tax on the country's bank depositors to decrease the costs of the bailout -- a tax that if passed by parliament would mark the first time that such a strategy has been implemented during the five-year eurozone crisis. The move may erode savers' confidence across the currency bloc and add to anger over the handling of the crisis.
The plan for a "stability levy" of up to 10 per cent on deposits in Cypriot banks was a "hazardous way of funding a bailout, even if it removes the need for the Cypriot government to implement painful spending cuts and tax increases", said Perpetual's head of investment market research, Matthew Sherwood. He said the proposed Cypriot deposit tax had the potential to start a bank run in Cyprus and bigger eurozone economies, where public finances were already fragile.
