Just as investors globally thought that Europe could save itself from itself, it turns out that leaders in the continent are also very good at digging themselves a deeper hole. This time, it was comments from Eurogroup Finance Minister Jeroen Dijsselbloem that sent markets lower.
Speaking after leaders had reached an agreement with Cyprus over its bailout, Dijsselbloem said:
"If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."
The last line is the scary part. Prior to last week's discussion of deposit levies in Cyprus as a means to raise funds to recapitalize the over-leveraged banking sector, deposits around the world were thought to be sacred. Even those deposits over the insured limits were thought to have been protected from creditors in the eventuality of default. Spanish Finance Minister Luis de Guindos publicly came out and defended deposits at Spanish banks as "sacred." Thus, he was trying to say that the Cyprus deposit levies were a one-off event and that it would not happen again.
Well, he was lying through his teeth... Or at least his boss Dijsselbloem did not inform him of the overall plans to make depositors now a key part of any bailout plan. Now, depositors at European banks should be worried.
Previously, bailouts would generally follow this pattern:
- Banks should raise new capital in private markets (equity, bonds, etc.).
- Banks would cut dividends.
- Banks would wipe out shareholders.
- Banks would wipe out bondholders.
- Then, banks would get taxpayer money.
- Banks should raise new capital in private markets (equity, bonds, etc.).
- Banks would cut dividends.
- Banks would wipe out shareholders.
- Banks would wipe out bondholders.
- Banks would wipe out uninsured deposits.
- Then, banks would get taxpayer money.
Markets shuddered on this news as it truly marked a paradigm shift in how investors and savers overall view deposits, specifically at European banks. Risk premium for global financials surged this morning following the comments, as the Markit iTraxx Senior Financial CDS Index surged 9.69 basis points to 186.90 basis points with the basis surging to positive 18.2 basis points. Further, the Subordinate Financial CDS Index surged 8.8 basis points to 308.14 basis points with the basis widening to 20.1 basis points.
U.S. financial stocks initially sold off strongly on the news, declining about 1.15 percent peak-to-trough before rebounding back to near flat on the session. However, financials in Europe traded lower by 3.16 percent with banks declining over four percent. Intessa Sanpaolo and Societe Generale both declined over six percent heading into the European market close and Unicredit declined over 5.8 percent.
U.S. Treasury yields on the benchmark 10-year bond rose as high as 1.972 percent before the comments to as low as 1.9068 percent, a decline of over seven bps. Spanish ten-year bond yields rose nine basis points to 4.92 percent, just below the dreaded 5 percent mark. German 10-year bund yields declined three basis points to 1.348 percent, confirming the clear risk-off environment in Europe.
BY Matthew Kanterman