EURO GOVT-Cyprus bailout template rattles Spanish bonds

Mon Mar 25, 2013 12:47pm EDT

Related Topics

* Spain, Italy suffer as Cyprus bailout seen as template
    * Initial relief at Cyprus deal evaporates, Bunds rebound
    * Italy political risks still high on investors' agenda


    By William James
    LONDON, March 25 (Reuters) - Spanish and Italian bond yields
rose on Monday as policymakers fuelled worries that Cyprus's
bailout, which hit investors hard, could be used as a template
for the region's other struggling countries.
    Initial relief that Cyprus had reached a last-gasp deal to
avoid financial meltdown quickly reversed to drive safe-haven
German Bunds higher and put peripheral bonds under pressure
after comments from Jeroen Dijsselbloem, who heads the Eurogroup
of euro zone finance ministers. 
    Among other measures, the Cypriot bailout wound down the
country's largely state-owned Popular Bank of Cyprus,
wiping out senior bondholders, while depositors with more than
100,000 euros in their accounts will face a large levy.
    Dijsselbloem said this structure represented a new template
for resolving euro zone banking problems and other countries may
have to restructure their banking sectors. That turned the
spotlight on Spain, whose banks have suffered badly from souring
property loans. 
    "We're all now coming round to the idea of bail-ins along
with bail-outs, but to maybe suggest that the first point of
call is the sovereign state of a bank, or the creditors of banks
- that's a big leap," a London-based bond trader said.
    "If you're an uninsured depositor at a bank in Spain you
wouldn't be too happy about this." 
    Spanish 10-year bond yields rose 10 basis
points on the day, to 4.96 percent, while the Italian equivalent
bond yield rose 5 bps to 5.58 percent. Both were
within recent ranges but the implication of the Cyprus deal
could make investors more sensitive to the two countries'
problems.
    Spain's economy is in recession and data points to a further
deterioration that will hamper Madrid's efforts to rein in
public finances and keep government borrowing under control.
    
    ITALY RISKS
    In Italy, investor concern is focused on the fallout from
inconclusive elections a month ago that left the euro zone's
third largest economy struggling to form a government, raising
worries that reform efforts would be impaired.
    "The situation in Italy has been overshadowed, but it
remains a big risk factor," said Niels From, chief analyst at
Nordea in Copenhagen. 
    "There could be more focus on it now that they have to start
more seriously to find a government. The risk is of new or early
elections and what the outlook is for how the parties will be
(represented) in the parliament."
    Former prime minister Silvio Berlusconi, whose strong
showing in the election rattled many investors, has demanded to
be included in any new government, but there was no sign his
centre-left rival Pier Luigi Bersani was considering such a
move. 
    German Bund futures, sought in times of market stress for
their low risk and high liquidity, rose 36 ticks to 144.73 -
back to levels seen last week before Cyprus's bailout was
agreed.
    While the list of concerns continues to grow for euro zone
investors, traders said the flow behind Monday's market moves
was minimal, indicating that many long-term investors had yet to
decide on the implications of recent events.
    Market participants said the European Central Bank's
long-standing promise to start buying government bonds if a
struggling state needs assistance was helping to keep panic
selling to a minimum.
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