European banks slide as Cyprus rescue plan may hurt ratings

European banks declined on concern an unprecedented tax on savings in Cyprus will have negative implications for the ratings of the continent’s lenders.

The Stoxx 600 Banks Index dropped as much as 2.4%, led by banks in crisis-hit Italy and Spain. UniCredit SpA, Italy’s biggest bank, slumped 5.2% to 3.63 euros at 1:20 p.m., the lowest level in three months. Societe Generale SA lost 5.3% to 28.40 euros in Paris.

European finance ministers reached an agreement on March 16 forcing depositors at Cypriot banks to share in the cost of the latest euro-zone bailout. Moody’s Investors Service said the decision, due to be voted on in the Cypriot parliament tomorrow, may hurt the confidence of savers at European banks and limits support for bank creditors in the region.

“The psychological crux is that savers can now be called on to contribute to bailouts and it might have been smarter to let deposit insurance do its job,” Ingo Frommen, a banking analyst with Landesbank Baden-Wuerttemberg in Stuttgart, said by telephone.

The measures would raise 5.8 billion euros ($7.6 billion) by taking a piece of every bank account in the country. Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere.

European Deposits

Goldman Sachs Group Inc. said the steps may unnerve deposit-holders in the nations most impacted by the European debt crisis.

“It is reasonable to expect that the deposit volatility in stressed sovereigns could rise,” Goldman Sachs analysts including Jernej Omahen wrote in a report to investors. Still, any response from depositors in Italy, Ireland, Spain and Portugal will probably be limited as their “perception of banks has improved,” they said.

UniCredit also led the credit default swaps of European banks higher, with contracts on senior debt rising 21 basis points to 344.

While criticizing the plans as “setting a dangerous precedent,” UBS AG expected “no immediate bank runs in other countries,” analysts including Thomas Wacker said in an e- mailed report.

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