Fear returned to global markets on Monday as investors responded in a savage way to scenes of Cypriot bank depositors queuing to withdraw money on the weekend.
More than 2 per cent was wiped from Australia's bourse, 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 the 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 on Friday night between Cyprus, eurozone officials, the International Monetary Fund and the European Central worth €10 billion ($12.6 billion), 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 point 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, the managing director of hedge fund Blue Sky Apeiron. "Our expectation is that the ECB and European elite will come out with a fair bit of rhetoric in the next 48 hours to try to calm a potential storm, but we're treating it as another potential top [in the market]," Mr Hobart said.
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.
"The issue for market participants is less about Cyprus per se, given Cyprus accounts for only 0.2 per cent of eurozone GDP," said Peter Dragicevich, foreign exchange economist at the Commonwealth Bank.
"Rather, the issue is more about what the precedent of imposing a large one-off levy on bank deposit holders to help finance Cyprus' bailout may mean for any future bailouts across the eurozone."
Locally, the big miners and banks took a hit as the benchmark S&P/ASX 200 index fell 104.8 points, or 2.05 per cent, to 5015.4. The broader All Ordinaries index 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, the Commonwealth shed 96¢ to $69.22 and ANZ was 64¢ lower at $28.08.