Cyprus deal could mean boom for U.S. stock market

The island country secured a 10 billion euro rescue package early Monday morning

By Tom Krisher

Published March 25, 2013 11:55AM (EDT)

The last-ditch effort to save the banking system in Cyprus should bring a rally when U.S. stock markets open on Monday, according to several investment managers.

Cyprus secured a 10 billion euro ($13 billion) package of rescue loans in tense, last-ditch negotiations early Monday, In return for the bailout, Cyprus' second-biggest bank, Laiki, will be restructured, and holders of deposits exceeding 100,000 euros will have to take losses.

It was unclear just how big of a hit big depositors will have to take, but the tax on deposits was expected to net several billion euros.

U.S. investors won't care too much about who takes losses in Cyprus, as long as there's a bailout that stops the run on banks in the Mediterranean island nation and keeps the eurozone stable, said Karyn Cavanaugh, market strategist at ING Investment Management in New York.

"If this works out, regardless of the terms, this is going to be good for the market," she said Sunday night.

Without a deal by Monday night, the tiny Mediterranean island nation of about 1 million would have faced the prospect of bankruptcy, which could have forced it to become the first country to abandon the euro currency. That precedent would have roiled markets and spurred turmoil across the entire eurozone.

The tax on large deposits likely will be 10 to 20 percent, in order to raise about $7.5 billion, said Jack Ablin, chief investment officer for BMO Private Bank in Chicago. The move should be well received by U.S. investors because it's the third bailout deal in the eurozone, including Greece and Spain, and in each case the countries have agreed to austerity plans.

"I suspect investors will take that news pretty well," he said.

The Dow Jones industrial average dropped more than 90 points Thursday in part on fears that the crisis in Cyprus will intensify. But it rebounded and erased the loss on Friday.

Late Sunday, Dow Jones industrial futures were up 42 points to 14,501. The broader S&P futures added 6 points to 1,558.00 and Nasdaq futures rose fractionally as well. Japan's benchmark Nikkei 225 gained 1.35 percent to 12,505.51 in early trading.

ING's Cavanaugh said she's still concerned that the U.S. economy, with recent weak corporate earnings, may be hurt by economic troubles in Europe. She's advising investors to be defensive, staying in the market but moving some of their portfolios into bonds.

Tom Krisher

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Associated Press Cyprus Euro Euro Zone European Union U.s. Stock Market