Investors breathed a sigh of relief Monday after Cyprus clinched a bailout deal with international creditors that will prevent it becoming the first country to ditch the euro — a prospect that could have worsened the crisis afflicting Europe's single currency.
In the early hours of Monday morning in Brussels, an agreement was reached in Brussels that capped one of the most tumultuous weeks since Europe's debt crisis started three and a half years ago.
In return for a €10 billion ($13 billion US) bailout from its European partners and the International Monetary Fund, Cyprus agreed to drastically shrink its outsized banking sector, cut its budget, implement economic reforms and privatize state assets — a cocktail of measures that mean the country's near-term economic prospects are bleak indeed.
The deal will allow the European Central Bank to continue providing liquidity to the remnants of Cyprus' banking system.
Cyprus' side of the bargain is earmarked to raise €5.8 billion. To do so, the country's second-largest bank, Laiki, will be restructured and bond holders and holders of bank deposits of more than €100,000 will have to take significant losses. Depositors in the biggest bank, the Bank of Cyprus, with over €100,000 will also bear a cost but those with savings up to €100,000 will be guaranteed in accordance with the EU's deposit insurance guarantee.
"Equities are enjoying a relief rally this morning as the imminent threat from Cyprus appears to have been abated, but where the markets go from here remains to be seen," said Mike McCudden, head of derivatives at Interactive Investor.
In Europe, the FTSE 100 index of leading British shares was up 0.6 per cent at 6,430 while Germany's DAX rose 1 per cent to 7,991. The CAC-40 in France was 1.3 per cent higher at 3,819.
The euro was also well-supported, trading 0.3 per cent higher at $1.30.
And Wall Street was poised for a solid opening with Dow futures up 0.2 per cent and the broader S&P 500 futures 0.3 per cent higher.
The focus will likely remain on developments surrounding Cyprus for a while yet. In particular, investors will be interested to see if the level of bank withdrawals from the country's banks when they reopen. That's scheduled for Tuesday.
A longer-lasting concern though is how the Cyprus deal plays out in other countries, notably those at the forefront of Europe's debt crisis. Will depositors look to reduce their holdings in Spain, Italy and Greece?
"The risk is contagion and the political fall-out from a badly handled crisis," said Jens Larsen, chief European economist at RBC Capital Markets.
Earlier, investors in Asia had the first chance to respond to the Cypriot developments and there too the response in financial markets was of relief. Japan's Nikkei 225 index surged 1.7 per cent to 12,546.46m while South Korea's Kospi jumped 1.5 per cent to 1,977.67. Hong Kong's Hang Seng rose 0.6 per cent to 22,251.15.
However, mainland Chinese shares fell Monday, with the Shanghai Composite Index down 0.1 percent at 2326.72 and the smaller Shenzhen Composite Index falling the same rate to 959.93.
Oil prices tracked equities higher, albeit modestly, with the benchmark New