Europe again.

Investors have been spooked once more by fears that a seemingly localized snafu could engulf the region.

U.S. stock futures indicated that markets were headed for a lower open Monday.

The European Union unveiled a €10 billion plan early Saturday to rescue Cyprus’ outsized banking sector and avoid a default. Though the bailout of the tiny nation is relatively small, the EU has required a one-time tax of 6.75% on bank deposits of less than €100,000 and 9.9% for those over that amount.

The worry is that investors and depositors in other financially weak European nations might fear similar bailout provisions in the future, which has the potential to destabilize global financial markets.

“For now, one would suspect that markets are calm enough that the contagion will be limited, but such a move could easily amplify any future crisis in Europe as the specter of deposit losses will now be on the table whatever politicians say in advance,” wrote Deutsche Bank analyst Jim Reid, in a report to investors.

Also, Cyprus isn’t just some isolated island nation. The impact of a high tax would be immediately felt by investors in other countries.

“Cypriot banks are widely thought to hold large sums of legally questionable funds – a true tax haven – especially by Russian standards,” said Marc Chandler, analyst for Brown Brothers Harriman. “Estimates suggest more than half the deposits in Cyprus belong to non-residents.”

Related: Rush to ATMs in Cyprus on EU bailout tax

Russian investors, in particular, have a lot of money tied up in the country’s banks, a fact that was not lost on Moody’s Investors Services.

“Russian banks’ operations in Cyprus could incur moderate credit losses if those banks have material exposures to Cypriot companies of Russian origin or to Cypriot banks,” said Moody’s.

In reaction, Japan’s Nikkei plunged 2.7% on Monday, the Hang Seng in Hong Kong declined 2.2% and the Shanghai Composite lost 1.3%. European markets were sharply lower in morning trading, and the euro fell by more than 1% against the dollar.

In the U.S., the spotlight is likely to remain on Cyprus, with little domestic economic or corporate news on the docket Monday.

Fear Greed Index: Extreme greed!

After rising for the past 10 trading days, the Dow Jones industrial average fell 0.2% Friday, ending the longest winning streak since 1996.

Chesapeake Energy (CHK, Fortune 500)shares will be in focus after the company announced late Friday that it would continue its attempt to buy back $1.3 billion of its bonds.

Carnival Corp. (CCL) could be another stock to watch, after the cruise line issued a weak sales forecast for the year on Friday. The company has had a string of mechanical issues over the last several weeks, and the company’s stock fell more than 3% in premarket trading on Monday.

To top of page

Leave a Reply