Cyprus Bailout: Stock Markets Take Tumble

Borrowing costs have risen sharply for countries which received bailouts at the height of the eurozone crisis amid the controversial rescue deal for Cyprus.

The FTSE 100 followed other European stock markets lower when trading began in London, falling 1.6% in the first few minutes before clawing back some of that loss as investors digested the implications of the agreement, which would effectively tax the savings of depositors at Cypriot banks.

Asia was first to give its reaction with the Nikkei in Japan closing 2.7% lower while the Hang Seng lost 2%.

Those falls were more closely matched on the bourses of the countries at the centre of the euro crisis with the Spanish IBEX losing 2.3% on opening. The MIB in Italy was 2.2% down.

Banking stocks took the brunt of the losses amid an EU and IMF demand that in return for 10 billion euros (£8.56bn), Cyprus impose a tax on savings deposits.

Among the biggest losers on the British markets were Barclays (down 4.4%) and Royal Bank of Scotland (down 3.44%).

By the end of the day, the FTSE 100 had closed down 31.73 points -- that's 0.49% -- at 6457.92 and the pound was trading at 1.154 euros.

The threat of taxing savers, which is yet to be rubber-stamped, heightened fears of contagion in the euro area as they were seen by investors as a radical departure from previous aid packages.

Though Cyprus only accounts for around 0.2% of the combined output of the 17 European Union countries that use the euro, the tax on depositors stoked fears of bank runs in other troubled European economies.

For the UK, the turmoil helped the pound recover some lost ground on the euro as sterling gained 1.2p on the single currency.

There was also a positive implication for the cost of servicing the country's sovereign debt as bond yields tumbled, though the benchmark 10 year debt costs rose sharply for nations such as Spain and Portugal.

Portugal, which has already received a rescue, saw its yield climb back above the 6% mark - closer to the 7% figure seen as bailout territory.

Spain is widely seen by economists as the euro nation with the worst problems and most at risk of needing a sovereign bailout despite its banking sector previously securing help.

Tobias Blattner, director of Economic Research at Daiwa Capital Markets, told Sky News the terms of the Cyprus bailout had shaken the faith of investors amid the continuing uncertainty over the result of Italy's elections.

He said: "We had trust and faith coming back to European financial markets over the last couple of weeks and months. We had a lot of foreign investment coming in to Spain and Italy and all of this is of course in doubt again."