Cyprus - To Template, Or Not To Template: That Is The Wall Street Question

After one of the most fabulous verbal faux pas in recent history was committed yesterday, in which the truth briefly escaped the lips of the new Eurogroup head who still has to learn from his masterful "when it becomes serious you have to lie" predecessor and ever since both he and all of uber-incompetent Europe have been desperate to put the genie back into the bottle to no avail, everyone has been caught in a great debate: to template, or not to template?  Below is a summary of Wall Street's thinking on this key for so many European (and soon global) depositors.

Deutsche Bank:

  • Damage from Dijsselbloem’s earlier message was done even as he tried later to clarify his Cyprus template remark, Jim Reid, head of fundamental strategy at Deutsche Bank, writes in note
  • Cat increasingly let out of bag in past week on different ways to resolve future banking and sovereign crises; comments yday add to risk nothing is off the table when it comes to future issues
  • Investors and creditors may also take the view that there’s increasing inconsistency about future rescues



  • Dijsselbloem’s comments reflect clear misalignment in views among Europe’s leaders on structure and timing of banking resolution, Fabrice Montagne, economist at Barclays, writes in note
  • Expect policymakers to clarify ESM role at upcoming EU summit in June; no clarity at the moment on whether ESM will take full responsibility for bank recapitalization for weak banks once the single supervisory mechanism is in place


Morgan Stanley:

  • Cyprus bailout shows increasingly apparent change in EU approach to place burden on investors and depositors rather than tax payers, Hans Redeker, strategist at Morgan Stanley, writes in note
  • Dijsselbloem’s comments of Cyprus template is consistent with with the change in approach to bailouts even after he back-pedaled; comments consistent with those of Merkel and recent bank nationalization in Holland
  • Investors who recently returned to peripheral mkts may be deterred by perceived change, increasing EUR’s downside risk



  • Dijsselbloem’s comments, together with the ditched plans to take on small deposit holders, show genuine change in approach to solve banking sector problems
  • In future, tax payers may not be the only source to absorb banking sector losses; re-fragmentation in
    Eurozone could be a consequence of Cyprus deal
  • Negative for Ireland if Dijsselbloem’s comments do point at a change in stance; inability to resort to ESM to take over recapitalization of Irish banks may complicate exit from bailout



  • Although Dijsselbloem’s comments were partly retracted, mkts have interpreted it as indication that private sector bail-ins will need to play a larger role in any future bailouts, Steven Saywell, strategist at BNP writes in note



  • Investors bought peripheral bank shares and corporate bonds in the belief Europe is heading towards a banking union with single supervision and an ESM-backed bank resolution mechanism, Valentin Marinov, strategist at Citigroup, writes in note
  • That belief is badly shaken; euro-denominated assets are vulnerable, adding to more EUR downside risk



  • Europe is establishing the principle that sovereigns will not bear the whole burden of bank bailouts, but sovereign failure is even less acceptable than before, Kit Juckes, strategist at SocGen, writes in note
  • Dijsselbloem’s timing was awful but there’s no point saying banks must not be too big too fail, and then bailing out all bondholders and depositors when they do fail
  • Bank regulators will be more conservative, savers more nervous and monetary transmission mechanism more broken



  • Eurozone bank stocks were hit hard yday on comments Cyprus is the new benchmark for bailouts; international investors will be monitoring deposit flows and Luxembourg and Malta, given that bank asset to GDP is now a popular metric, Chris Turner, strategist at ING, writes in note

Source: Bloomberg


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