Cyprus bailout debacle: the damage is done
Jeroen Dijsselbloem's remark that the Cyprus bailout could serve as an example for others was later toned down, but markets are jittery
The reality of bail-in was brought home to senior unsecured investors by comments by Eurogroup president Jeroen Dijsselbloem on Monday that Cypruss bail-out should serve as a template for other eurozone bank bail-outs.
Senior bondholders in Cypruss second largest lender, Laiki Bank, were bailed in as part of the countrys banking sector bailout, agreed on Monday.
Dijsselbloem appeared to back-track on Monday afternoon by saying Cyprus was a specific case with exceptional challenges. But the damage had been done: the more positive tone in the FIG market had been reversed.
The iTraxx senior financials index, which had moved 8 basis points tighter on the news a bailout had been agreed on Monday morning, swung back to close 12 basis points wider on Monday at 188 basis points, its highest level since November.
At the risk of repeating ourselves, our view is that the restructuring of failing banks and burden-sharing of creditors including potentially senior or if necessary uninsured deposits is the new norm and that it is not priced in, especially for longer-term cash bonds of peripheral banks, wrote BNP Paribas analysts on Tuesday.
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But not much selling was seen in periphery cash bonds, even as shares in UniCredit and Intesa Sanpaolo were hit by up to 6% on Monday, FIG syndicators told EuroWeek Bank Finance on Tuesday morning.
Senior was steady again on Tuesday morning, with the iTraxx senior index squeezing in 2 basis points to 186 basis points.
The lack of supply in the last few weeks is still supporting cash bonds.
Especially for asset managers, they already have the problem of finding places to invest so the last thing they are going to do is sell assets where they are sitting on a comfortable yield even if they see them widening by 20bp, said one FIG banker.