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By Steve Slater
LONDON, March 26 (Reuters) - If the bailout of Cyprus is atemplate for European rescue deals it marks a "game-changer" forbanks that could raise funding costs, see deposits shift morequickly and delay the prospect of higher dividends.
Europe signalled this week that large depositors wouldshoulder part of the cost of future bank bailouts after savingsover 100,000 euros were targeted in the Cyprus rescue package.That sent bank share prices falling and pushed up the cost ofinsuring bank debt against default.
"Bail-in is thus replacing bail-out. As a consequence, thecost of bank funding will increase, bank deposits will becomeless sticky, and banks must hold more equity capital to reassuretheir creditors," said Nick Anderson, analyst at Berenberg.
"The elephant in the room has been spotted at last."
Jeroen Dijsselbloem, head of the Eurogroup of euro zonefinance ministers, said on Monday that in future, the currencybloc should first ask banks to recapitalise themselves, thenlook to shareholders and bondholders and then "if necessary" touninsured deposit holders.
"Now that the crisis is fading out, I think we need to darea little more in dealing with this," he said.
In addition to big depositors, senior bondholders inCyprus's second-largest bank, Laiki, will be wiped outand holders of senior paper in the largest lender, Bank ofCyprus, will also be hit.
In previous packages for Greece, Ireland, Portugal andSpain, leaders were unwilling to force losses on either seniorbondholders or savers for fear of prompting flight from banksacross the region.
Under new EU regulations, senior bondholders would bear partof the cost of future bank bailouts but that provision is notdue to be enforced before 2015. Non-eurozone member Denmark isthe only EU state to impose losses on senior bondholders inrecent years, but after its banks were shut out of debt marketsin 2011 it has moved to limit the likelihood of such losses.
Europe's banking index was down nearly 0.6 percentby 1310 GMT, adding to a 1.9 percent fall on Monday and puttingit on course for a fourth successive daily fall.
Banks in Italy and Spain, two countries at the heart of theeuro zone crisis, were among the biggest fallers with UniCredit and Spain's BBVA down over two percent.Italian regional lender Banca Carige had slid overthree percent.
The cost of insuring European banks' senior bonds againstdefault rose, with the Markit iTraxx senior financials indexwidening 14 basis points to 181. The index for subordinatedbonds - riskier as they rank behind senior debt if a bank iswound up - widened 20 basis points to 302 basis points.
Critics of the action on Cyprus said it had re-establishedthe link between weak banks and weak sovereigns and could scaredepositors, but others said it was long overdue.
"Finally the EU is doing the right thing. If you take risk,if you're an equity holder, a bondholder, or an uninsureddepositor, you should be at risk," said Simon Maughan, analystat Olivetree Securities. "It is the bailing out of thebondholders that has been the biggest problem throughout thesebailouts."
Maughan said there were still risks in Spain, Italy andpossibly France. "The only way to deal with them would be tomake the investors that put money in in the first place to frontup," he said.
"WAKE-UP CALL"
Deposits above 100,000 euros have been at risk since thelevel of guarantee was raised and reinforced during the 2008/09financial crisis. Cyprus is a reminder that above that leveldepositors are effectively unsecured creditors.
Savers are more likely than ever to spread their casharound, analysts said.
"It's a wake-up call... and deposits are likely to be morefluid if you see a risk emerging," Maughan said.
"It is now rational for ... depositors to move their moneyto stronger non-Eurozone banking jurisdictions such as the UK orSwitzerland," said Andrew Lim, analyst at Espirito Santo.
Mike Harrison, analyst at Barclays, said the Cyprus eventscould also speed up plans for countries to establish pre-fundedschemes for deposit insurance.
"This could be a catalyst to more harmonisation of thepre-funding of the scheme," he said.
Bondholders are likely to be more alert to risks too.
"The concept of bail-in appears to be happening quicker thanperhaps people had anticipated. It feels that with Cyprus it ispotentially now grinding closer in theory and in practice,"Harrison said.
That is likely to increase volatility, especially for banksseen as more at risk, and result in greater differentiation inborrowing costs for strong names like HSBC versus morerisky banks such as Italy's Monte Dei Paschi, whichhas received a 4 billion euro Italian state bailout.
The yield on Monte dei Paschi's senior debt rose 41 basispoints to 5.16 percent early last week after an initial plan totax Cyprus bank deposits was announced. It has since bouncedaround from 4.80 percent on Monday to 5 percent on Tuesday. Incontrast, senior debt for HSBC remained steady at around 1.5percent.
Banks may have to hold back on lifting dividends ifinvestors demand they hold another buffer on top of minimumcapital requirements, analysts said. That could dent hopes of apossible rise in payouts this year.
But most banks are already under pressure to hold back onpayouts until they have a comfortable capital cushion, and rulescontinue to differ across countries. Norway, for example, tookaction last week to raise its already high capital requirementsand implement them before most other European countries.
