Investors Viewing European Banks With a Wary Eye
Spreads are widening among European-bank bonds, while holders of Cypriot bonds are now at a greater risk of impairment in future bailouts.
Credit indexes weakened slightly last week as the markets digested the broader potential impact of the Cyprus bank restructuring. The average spread of the Morningstar Corporate Bond Index widened 1 basis point to +140 and the average spread of the Morningstar Eurobond Corporate Index widened 3 basis points to +141, whereas the credit spreads of European banks widened significantly. For example, Markit's iTraxx Senior Financial credit default swap index widened almost 50 basis points to +205.
The impetus for this spread widening is the market's realization that future bank bailouts will be conducted at the expense of shareholders, bondholders, and uninsured depositors (in that order), instead of being offloaded onto taxpayers. Under this new bank restructuring template, bondholders are now at a greater risk of impairment in future bailouts and are thus requiring a higher return. Another implication of this restructuring is that local politicians will have little, if any, say in a banking restructuring. While the original Cyprus proposal to "tax" the depositors required parliamentary approval, no such government approval was needed to effect the terms of the final restructuring.
David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.