Stocks Fall Globally as Cyprus Deal Dissected

NEW YORK�Global markets tumbled Monday as investors spurned the euro zone's handling of the crisis in Cyprus.

The Dow Jones Industrial Average dropped 73 points, or 0.5%, to 14438 in afternoon trading Monday. The blue chips changed course after climbing as much as 52 points shortly after the opening bell, their biggest reversal in a month.

Initially, investors were concerned that the painful measures required to secure a bailout in tiny Cyprus could be repeated in larger European countries. Early Monday, Eurogroup head Jeroen Dijsselbloem said the bailout could serve as a template for dealing with future problems with the region's banks, according to some media reports.

Enlarge Image

Close Reuters

Cyprus banks still were closed Monday. Stocks sold off globally as investors digested an aid package for the distressed euro-zone country.

In the Markets

• Live: Markets Pulse Stream
• MarketBeat: Cyprus as 'Template' Stokes Fears
• MarketBeat: Bullish Crowd Attracts Another Member

Later, though, Mr. Dijsselbloem backed away from these comments. "Cyprus is a specific case with exceptional challenges," he said in an official statement distributed on Twitter. "Macroeconomic adjustment programs are tailor-made to the situation of the country concerned and no models or templates are used."

U.S. stocks pared losses after the statement was released. At one point, the Dow was down as much as 117 points on the day.

In Europe, shares of banks, particularly those based in the region's weaker countries, were among the hardest hit. U.S. bank stocks held up relatively better.

Cyprus' struggle to secure international assistance in rescuing its financial sector has brought the euro area's debt saga back to center stage. The country secured an aid package early Monday, but at a steep cost, breaking a taboo by agreeing to tax depositors' holdings and hit another group that has generally been spared financial-crisis pain: senior bank bondholders.

Many regard Cyprus' economic importance as negligible, but see the precedents of dipping into savers' assets and haircutting bank bondholders as more serious, said Dan Morris, a London-based global market strategist at J.P. Morgan Chase's asset management division, which oversees $1.4 trillion in assets.

"If this is a new template for dealing with banking problems in the E.U.," Mr. Morris said. Such an outcome potentially makes European banks "a less-attractive and riskier investment," Mr. Morris said.

Italy's FTSE Mib tumbled 2.5% and Spain's IBEX 35 slid 2.3%, reflecting investors' fears about the potential for contagion. The iShares MSCI Europe Financial Sector Index exchange-traded fund, which tracks a basket of bank stocks in the region, slumped 2.6%, its third-biggest daily drop this year.

U.S. stocks also traded lower, reversing the Standard & Poor's 500-stock index's morning climb toward an all-time closing high. But American financial shares were spared the heavy selling seen in parts of Europe. The S&P 500 declined 0.5%, and financial shares in the index dropped in line with the broader group.

"This particular risk is primarily European," said Mr. Morris. He said he sees the selloff tied to the latest drama in Cyprus as an "overreaction" and has been counseling clients not to see it as indicating a major change in the market's direction.

The selling comes as steep gains so far this year have left many investors wondering if the market is due for a pullback.

"Market participants remain largely bullish and somewhat crowded," Arvin Soh, portfolio manager at the $53 billion GAM, said in an e-mail. "While there is the risk that Cyprus does become a template, it's probably more that it was a good enough reason for people to take profits."

Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com