Controversial Cyprus Proposal Brings Euro Crisis Back Into Focus

A controversial bailout proposal and bank depositor levy for Cyprus brought the euro-zone’s debt crisis back into focus Monday, causing bond yields to leap, the euro to initially sink against the dollar and Europe’s bank shares to plunge.

News over the weekend spooked the market, after a 10 billion euro ($13 billion) bailout for Cyprus included an unpopular levy on all deposits in the island’s banks.

If the proposal is passed by parliament–Cypriot lawmakers are expected to vote today–this would mark the first time such a strategy has been implemented during the five-year euro-zone crisis.

The European currency was initially hit hard, falling to a three-month low of $1.2882 and the yen resumed its role as a safe-haven asset as it strengthened against the dollar. However the euro started to pare losses one hour into the European session as did other areas of the financial spectrum.

Italian and Spanish bond yields at first climbed sharply and then eased; by 0900 GMT Italy’s 10-year government bond yield was 0.08 percentage points higher at 4.68% and Spain’s bond yielded 5.03% up by 0.13 percentage points, its highest level in 10 days. The Cypriot bailout deal could put the spotlight on Spain’s bond auction, due later in the week.

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