A bailout for Cyprus was agreed in the early hours of Monday, an expected but still welcome development. However, a consequent revival of risk appetite didn't materialise today, not least because the head of the Eurogroup made a statement that was unhelpful, to put it mildly.

Dutch finance minister Jeroen Dijsselbloom, who has only been Eurogroup head since January, spoiled the mood when he said that the bailout could serve as a new template for banking restructurings. This seemed to contradict the EU line that Cyprus was 'unique' and a 'special case. Direct bank recapitalisations through the ESM - as well as an EU banking union - now seem further away than ever.

Dijsselbloom's unwise utterings led to a sharp reversal in sentiment. For most of the day, the Markit iTraxx Europe traded in the 114-117bps range, 2-4bps tighter than Friday close. After the Dijsselbloom intervention the index was 3.5bps wider at 122.5bps.

Banks, unsurprisingly, bore the brunt of the sell-off. The Markit iTraxx Senior Financials index widened 11bps to 187bps, with Italian and Spanish banks underperforming. Unicredit (376bps, +16) and Intesa Sanpaolo (360bps, +23) were significantly wider, as Banco Santander (303bps, +19).

If bail-ins for depositors are to become the norm, then any country that seeks an EU bailout could see a tougher line on recapitalising banks. This in turn may lead many to question why they should keep their money in banks based in countries that are in vulnerable positions. Dijseelbloem has only served to reignite contagion, exactly what the EU has been trying to avoid.

However, a feature of the Cypriot bailout meant that banks were already lagging behind the broader market. Senior bondholders in Laiki - Cyprus's second biggest bank that is being wound-up as part of the rescue package - will also be bailed-in. This makes sense if depositors are sharing the burden, and the sums involved are small. But it does set a precedent, particularly in light of Dijsselblom's comments. Senior bank spreads underperformed subordinated spreads today, the latter having become accustomed to bailout participation.

Poor liquidity in a holiday-shortened week could exacerbate volatility, particularly if politicians continue to make untimely comments.

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