LONDON, March 18 (IFR) - The cost of insuring the debt of European banks against default rose sharply on Monday after an unprecedented plan to tax Cypriot depositors to help save the country's banks.
Credit analysts said the decision could spark contagion across peripheral regions with the potential of widespread outflows of depositor cash from banks.
By 0750GMT, the European Markit iTraxx senior financials index was 17bp wider at 161bp, while the subordinated index was 23bp wider at 268bp, according to Markit.
The shock levy was announced over the weekend on all Cyprus bank deposits, and will raise around EUR6bn.
The move comes as governments and regulators have already begun to impose more aggressive losses on bondholders, evidenced most recently in the total wipeout of SNS Reaal subordinated bondholders earlier this year.
"The expropriation of SNS Reaal subordinated bonds, the imposition of losses on Anglo Irish senior bonds, and the haircuts of depositors in Cyprus form an ominous trend," Barclays credit analyst Jonathan Glionna said.
"Bondholders need to focus even more closely on existing national resolution frameworks and the Crisis Management Directive in Europe."
Riskier frameworks are in place in Switzerland, the UK, the Netherlands, and Germany, Barclays said.
Barclays also said the depositor levy raised the possibility of bail-in for senior bondholders to be moved forward to 2015 from 2018. (Reporting by Natalie Harrison, IFR Markets; editing by Alex Chambers)