By Herbert Lash
NEW YORK (Reuters) - Global equity markets pared gains and the euro retreated on Monday after the head of the Eurogroup said the Cyprus bailout reached early Monday could be a new template for resolving euro zone banking problems.
Cyprus agreed to a bailout that will avert a collapse of its banking system and keep the country within the euro zone, but sets a painful precedent for the region.
Cypriot policy-makers reached an eleventh-hour deal with the European Union, the European Central Bank and the International Monetary Fund to shut down its second largest bank in return for 10 billion euro.
The bailout brought immediate relief to investors who had feared Cyprus might default. But the deal will inflict heavy losses on depositors, including wealthy Russians, on deposits of more than 100,000 euros, which are not guaranteed under EU law.
Wall Street initially opened higher but retreated in morning trade, helping pull European equity markets lower, after Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck that forcing depositors and bank bond holders to bear losses could become a template for future bank restructurings. [ID:nL5N0CH2TJ] Safe-haven assets such as U.S. Treasuries and gold prices pared losses, and German Bund futures rose.
"The critical issue remains that of precedent for larger Eurozone countries, and the way in which the Cyprus situation has been managed does not seem to inspire a great deal of confidence," said Ilya Spivak, a currency strategist at DailyFX in New York.
The euro fell as low as $1.2866 and last traded at $1.2872, down 0.85 percent on the day, according to Reuters data.
The Dow Jones industrial average <.DJI> was down 31.08 points, or 0.21 percent, at 14,480.95. The Standard & Poor's 500 Index <.SPX> was up 0.13 points, or 0.01 percent, at 1,557.02. The Nasdaq Composite Index <.IXIC> was down 1.57 points, or 0.05 percent, at 3,243.43.
The pan-European FTSEurofirst 300 index <.FTEU3> of leading regional shares pared most of its gains to trade 0.14 percent higher at 1191.14.
MSCI's all-country world equity index <.MIWD00000PUS> rose 0.01 percent at 358.77.
Depositors in Cypriot banking institutions must contend at best with capital controls locking up their money, Spivak said. At worst, they may lose as much as 40 percent of their holdings.
"This raises an important question: Why should a depositor in any Eurozone country similarly vulnerable to a banking crisis expect to be unscathed if a Cyprus-like calamity were to befall them," Spivak said.
German Bund futures also retreated after initial gains as concerns emerged about the implications of the deal.
Bund futures were up 33 ticks on the day at 144.70, having fallen as low as 143.91 earlier in the session.
"The loss of confidence in the European banking system stemming from the Cypriot crisis will not only weigh on the banks but also on the economy of the region," added a Paris-based trader.
"The market is beginning to wake up to what's going on in Europe," said Ronnie Chopra, a strategist at TradeNext.
The benchmark 10-year U.S. Treasury note also pared losses, rising 2/32 in price to yield 1.9198 percent.
Oil remained higher. Brent crude rose 52 cents to above $108.18 a barrel.
U.S. light sweet crude oil rose $1.34 to $95.05 a barrel.
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Regional equity risk premiums:http://link.reuters.com/mum95s
Euro zone PMIs, GDP: http://link.reuters.com/rud84s
Cyprus deposits graphic: http://link.reuters.com/fuf76t
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(Additional reporting by Marc Jones in London, Julie Haviv in New York; Editing by Chizu Nomiyama)
