Cyprus Bailout 'Disaster' Risks New Euro Crisis

European Union

The decision by the euro zone to force bank depositors in Cyprus to contribute towards a bailout, a first in the euro zone debt crisis, could hurt other peripheral nations, the euro and the global stock market rally, analysts warned.

The decision shocked many, including Sharon Bowles, chair of the European parliament's economic and monetary affairs committee, who called it a "disaster" for European Union rules and the single market.

Euro zone finance ministers forced Cyprus' savers to pay as much as 10 percent of their deposits to help pay for a bailout of the country's troubled banking sector , a move which is expected to raise 5.8 billion euros. In return, the country will get 10 billion euros ($13 billion) in assistance.

The arrangement, structured as a bail-in, would give depositors shares in the banks in return for the levy.

(Read More: Cyprus Rescue Not a Fit for Other Countries )

Sebastian Galy, senior currency strategist at Societe Generale warned the levy could unleash a sell-off in the euro and the stock and bond markets of peripheral nations on Monday.

"This will probably go down as an ill thought-out rescue plan with consequences for peripheral Europe," he wrote in a research note. "It breaks a cardinal rule, namely public trust on which money relies...Some peripherals will suffer at the opening in Europe and [it will] hit EUR."

Doug Kass of Seabreeze Partners on Twitter predicted European stock markets could fall 3 to 4 percent on Monday, while the S&P 500 could fall 1.5 to 2 percent and Spanish and Italian 10-year yields could jump 15 basis points.

But Marshall Gittler, head of global forex strategy at IronFX, an online trading platform, took the opposite view, arguing the bailout could be positive for the single currency.

(Read More: Cyprus Parliament Postpones Key Session )

"This settlement-assuming it passes-removes that tail risk from the market. It also puts Cyprus on a healthy footing, with a debt/GDP ratio estimated at 93 [percent]-not far off the EU average of 90. The economy here can start growing again. So it's a win-win for the EU and Cyprus and should be well received by the markets," he said.

Meanwhile, The New York Times reported on Saturday that savers had already been trying to withdraw money from banks via ATMs and that many machines had run out of cash . But it might be too late already. Cyprus has declared a bank holiday on Monday to prevent such a run on the banks and banned electronic transfers.

Cyprus Finance Minister Michael Sarris defended the government's decision in an interview with CNBC: "It's not a pleasant outcome, especially of course for the people involved. But we believe it is something that, compared with other possible outcomes, is the least onerous. And we also believe that the exchange of this levy with shares in the banking institutions affected gives an upside potential."

But the rescue has already been thrown into doubt with Cyprus' parliament postponing an emergency session on Sunday to discuss the levy and several parties opposing the deal.

"When the dust has settled on this deal, which I hope it never does, we will see that the single market has been sold down the river for a shoddy price," said the EU parliament's Bowles.

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