The euro weakened to its lowest level this year, while stocks and commodities slumped, as an unprecedented levy on Cyprus’s bank savings threatened to throw Europe back into crisis. German two-year note yields dropped below zero as Spanish and Italian borrowing costs jumped.
The 17-nation shared currency sank 1.2% to $1.2926 at 9:30 a.m. in New York. The MSCI All-Country World Index lost 1.2%, retreating from the highest level since June 2008. The Stoxx Europe 600 Index slid 0.7% and the Standard & Poor’s 500 Index dropped 0.5%. Copper tumbled more than 2% and gold rose 1.1%. Germany’s note yields fell to as low as minus 0.003%. Spain’s 10-year rate climbed six basis points to 4.98% and the yield on similar-maturity Portuguese bonds rose 13 basis points to 6.08%.
Finance ministers in the euro area reached an agreement on March 16 forcing depositors in Cypriot banks to share in the cost of the latest bailout. Bank creditworthiness deteriorated the most since inconclusive Italian elections three weeks ago as Moody’s Investors Service said today the Cypriot levy is negative for bank depositors across Europe. Bill Gross at Pacific Investment Management Co. said it moves “risk-on” trades to the back seat.
“This creates a precedent and is a bit scary,” said Matthieu Giuliani, who helps oversee $5.3 billion as a fund manager at Banque Palatine SA in Paris. “It hurts the market. But this is case specific to Cyprus. I don’t see Germany or the EU imposing such a thing on Spain or Italy. It would create panic in the banking system.”
Cypriot lawmakers will meet tomorrow to ratify a levy to raise 5.8 billion euros ($7.6 billion) as part of a bailout aimed at preventing a financial collapse and a possible exit from the euro area. The meeting was delayed from today due to the need to examine changes to legislation, Speaker Yiannakis Omirou told reporters in Nicosia, in comments broadcast on state-run CYBC.
The euro slid as much as 1.5% against the dollar to $1.2882, its weakest level since Dec. 10, before paring its decline. It was 1.3% lower against the yen as Japan’s currency strengthened against all its 16 major peers.
The additional yield investors demand to hold Spain’s 10- year securities instead of benchmark German bunds widened 12 basis points to 359 basis points. Portugal’s 10-year yield spread to similar-maturity bunds widened to as much as 486 basis points today, the most in two weeks.