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Cyprus bank savings raid raises fresh eurozone contagion fears

Investors dump bonds raising borrowing costs of Italy, Spain, Greece and Portugal

The one-off tax raid on savers in Cyprus raised fresh contagion fears today as spooked investors dumped debt in the eurozone’s strugglers and the euro took a battering.

The implications for other nations in the single-currency bloc triggered a bond market sell-off which pushed up the borrowing costs of Italy, Spain, Greece and Portugal in a turbulent session.

Spain’s benchmark cost of borrowing for 10 years pushed beyond 5% while Portugal’s rose above 6%. Italy – where markets had calmed after last month’s inconclusive election – saw yields jump 11 basis points to 4.67%. Investors instead turned to safe-havens such as US, UK and Germany, which all saw falling debt costs.

CooperCity analyst Louise Cooper said: “The damage is done. Europeans now know that their savings could be used to bail out banks.”

The pound rose more than a cent to €1.1721 against the euro before falling back as investors absorbed the news of the unprecedented €5.8 billion (£5 billion) hit to depositors in return for a €10 billion rescue loan. The single currency also crashed to 14-month lows below $1.30 against the dollar.

The cost of insuring against sovereign defaults also soared. Investors looking to protect themselves against Italy going bust had to pay $295,000 to insure $10 million of debt for five years, according to financial data provider Markit — up $22,000.

The eurozone’s biggest banks saw their shares tumble amid fears that the savings swipe could prompt investors to pull their cash out.

Royal Bank of Scotland analyst Alberto Gallo warned: “Despite Cyprus being a special case in terms of the size of its banking system relative to GDP, we could see a general deterioration in deposit flows for smaller institutions in the periphery.

“In the worst case scenario, deposit flight could re-emerge in Spain and Greece.”