Fear returned to global markets on Monday as investors responded in a savage way to scenes of Cypriot bank depositors queueing to withdraw money at the weekend.
More than 2 per cent was wiped from Australia's market, and futures markets were pointing to a 2 per cent fall on Wall Street overnight on Monday, as local investors poured into fixed-income assets and pushed bond prices higher.
The catalyst was a decision by Cyprus' parliament to postpone an emergency session to vote on a levy on bank deposits after there were signs that lawmakers might block the deal agreed in Brussels to help fund a bailout.
The catalyst for the global rout was a deal struck Friday night between Cyprus, eurozone officials, the International Monetary Fund and the European Central Bank worth €10 billion ($1245 million) or close to 60 per cent of the country's gross domestic product.
It amounts to a "bail-in" of bank depositors - a one-off tax on bank deposits of 6.75 per cent for amounts up to €100,000, and 9.9 per cent for deposits above €100,000.
Traders were startled by the decision to put a levy on bank deposits, and scenes of Cypriots rushing banks to withdraw their money in a bid to avoid the tax.
"We knew this meeting was coming up, but there was no indication that it was going to come out with something as radical as a multibillion-euro hit to bank deposits, that's the real surprise," said Sean Callow, a senior currency strategist at Westpac.
"We just assumed that they've got a huge bailout fund, Cyprus is relatively small, [so] why couldn't they just lend Cyprus the money as they did to everybody else and just say 'please jump through these hoops or we won't lend you the money'," he said.
"But to whack depositors across the board is what's really shocking."
The storm hit as the S&P500 VIX Index - a measure of volatility - was at its lowest since early 2007, suggesting markets had not been so calm in five years.
Hedge funds said the decision was a shot across the bow for markets and could set a precedent for depositors in other peripheral nations in Europe.
"Over the next two or three days we want to see what the Spanish depositor does in response to this. You might see some queues building outside Spanish banks," said David Hobart, managing director of hedge fund Blue Sky Apeiron.
But some market-watchers said it was a "respectable sell-off", not an ugly fall.
"The reality is that this isn't really about Cyprus - it's just a trigger, nothing else - many are positioned for a fall and the market has been expecting one for a while," said Richard Coppleson from Goldman Sachs.
"Most will sit back as the market comes back, but as soon as it looks like the worst of the fall is over there will be a lot of cash rushing back in," he said.
Nomura head of of fixed income Jon Linton said the event in Cyprus made many investors very nervous, causing a return to fixed-income assets such as bonds.
"It has the potential to really change what is going on in Europe and put a real spanner in the works of the risk-on rally we have had," Mr Linton said.
Locally, the big miners and banks all took a hit as the benchmark S&P/ASX200 index fell 104.8 points, or 2.05 per cent, to 5,015.4. The broader All Ordinaries fell 101.9 points, or 1.99 per cent, to 5027.4.
BHP Billiton lost 2.4 per cent to $34.69, Rio Tinto shed 2.8 per cent to $59.55 and Fortescue tumbled 3.9 per cent to $3.90.
Among the banks, NAB fell 81¢ to $30.49, Westpac dropped 92¢ to $29.97, Commonwealth shed 96¢ to $69.22 and ANZ was 64¢ lower at $28.08.
One bright spot was rail operator Aurizon, whose shares were 0.5 per cent higher at $4.06.
The Queensland government halved its stake to about 8 per cent, netting more than $800 million amid strong demand.