Outcry over the tax, branded “astonishing” by Goldman Sachs chairman Jim O’Neill, has forced the Cypriot government back in to talks to renegotiate part of the bailout plan.

President Nicos Anastasiades had previously agreed to raise €5.8bn from taxing bank deposits as a condition for receiving a €10bn package from international lenders.

Deposits over €100,000 would have been taxed at 9.9%, and 6.75% would have been levied on deposits below that level.

The tax would not just have penalised Cypriots but a large number of overseas investors, including UK expatriates, and would have especially hurt Russia, whose banks have $12bn sat in Cyprus alongside a further $19bn from corporates, according to ratings agency Moody’s.

Following an initial outcry over the weekend, and a sell-off in some equity markets, a vote will now take place which may see the plan scaled back.

But what does the news mean for markets in the short term?

Equities

O’Neill said he expected a knock-on effect in the near term, with investors shunning other regional banks.

“I wouldn’t be surprised if markets gave a risk-premia to other global banking centres which are perceived as not being quite so stringent in attracting less desirable investments,” he said.

“Additionally, this would be similar for peripheral euro-area banks and markets, and it will require considerably more thought from European policymakers to ensure this doesn’t get out of control.”

This was playing out early today, with equity markets down across Europe, including in the UK.

Run on banks?

Many of the biggest losers throughout today’s session have been banks, including Soc Gen and BNP Paribas, down 5% and 4.2% respectively.

UK banks were faring no better, with RBS off 4.8% and Barclays off 4.5%.

Pensions expert Dr Ros Altmann said the plan makes a “mockery” of bank safety, adding the idea is a “monumental error of judgement” that could cause bank runs across Europe.

“The whole point of depositor protection is to reassure ordinary people that they can trust the system and know that their money is going to be protected at least up to the promised level,” she said.

“As soon as that trust is lost and depositors want their money back, the banks will no longer be able to function.

“It is likely that the actions in Cyprus will undermine trust and confidence in banks across other EU countries.”

However, Fidelity’s fixed income sovereign credit analyst, Tristan Cooper, said a widespread run was unlikely to materialise

“This is unlikely to trigger immediate bank runs in other peripheral countries. This is because systemic banking vulnerabilities have already been addressed in Ireland/Spain/Greece (at least in the first phase) and Italy’s banking sector is not the primary source of macro-financial risk.

Gold

Gold could be one beneficiary of the Cyprus situation, according to Capital Economics chief global economist Julian Jessop, as risk-averse investors take cash from deposit and put it in to gold.

“It is not unreasonable to assume that some of any outflows from European banks would find their way into gold in one form or another,” he said.

“The precious metal has recently fallen out of favour due in part to the perception that the eurozone financial crisis is essentially over, so the problems in Cyprus are a timely reminder that it is not.”

Risk on?

While markets are today lower across the board as the Cyprus situation flairs up, Adrian Lowcock, senior investment manager at Hargreaves Lansdown said there remains “significant support” for risk assets.

He argued a period of pull back could be a good time to re-enter equity markets.

“With the US, the world’s largest economy, having embarked on an unlimited amount of quantitative easing, there is significant support for investing in riskier assets,” he said.

“Markets do not rise indefinitely and indeed market rallies with periods of retrenchment tend to be more sustainable in the longer run as they give investors opportunities to get back in at a lower level.”