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Cyprus ‘Bail-In’ Is/Isn’t Template For EU Banks

First we have this from Reuters:

Dutch Finance Minister Jeroen Dijsselbloem

After Cyprus, eurozone faces tough bank regime – Eurogroup head

By Luke Baker | March 25, 2013

BRUSSELS (Reuters) – A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region’s finance ministers said.

"What we’ve done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem [Gesundheit!], who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

"If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’. If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said

The agreement is what is known as a "bail-in", with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.

The approach marks a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programmes.

That process, with governments and taxpayers bearing the costs and providing the back stop, had to stop, Dijsselbloem said. Recent financial market calm meant now was the time to make the change, although he conceded there was some concern that it could unsettle markets again.

"If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on,’" he said…

If adopted by the euro zone, Dijsselbloem’s template could also sound a death knell for a plan hatched nine months ago when the euro zone debt crisis was threatening to blow the currency area apart…

Well, it certainly will sound "a death knell" for the banks in Spain and Italy. And it turns out, Luxembourg and Malta and Slovenia:

Asked what the new approach meant for euro zone countries with highly leveraged banking sectors, such as Luxembourg and Malta, and for other countries with banking problems such as Slovenia, Dijsselbloem said they would have to shrink banks down.

"It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we’ll come and take away your problem. We’re going to push them back. That’s the first response we need. Push them back. You deal with them."

The marked change in attitude, which Dijsselbloem agreed was a shift in strategy for EU policymakers, has consequences for how banks are recapitalised and for how financial markets react…

Mr. Dijsselbloem’s comments immediately rattled the financial markets all around the world. So a board member of the group rushed out a statement "disagreeing" with Dijsselbloem.

From Reuters:

Cyprus was unique case, not model for EU: ECB’s Coeure

By Catherine Bremer | March 26, 2013

PARIS (Reuters) – The banking crisis in Cyprus was a unique case and the rescue plan used should not be seen as a model for other European countries that fall into trouble, ECB Executive Board member Benoit Coeure said on Tuesday…

[Coeure] said he disagreed with Eurogroup head Jeroen Dijsselbloem’s assertion that the Cyprus bailout would serve as a model for crises elsewhere, remarks the Dutchman backtracked on after markets read them as meaning private sector bail-ins would play a greater role in future rescues

"I do not see why we would use the same methods elsewhere," he said of the Cyprus rescue, which alarmed markets by setting a precedent of tapping private bank deposits.

"I think Mr. Dijsselbloem was wrong to say what he said. The Cyprus experience is not a model for the rest of Europe because the situation had reached a level which cannot be compared with any other country."

For some reason we are not quite reassured. After all, why should we believe a board member and not the head of the who heads the Eurogroup of euro zone finance ministers?

Meanwhile, Mr. Dijsselbloem himself has come out to say he didn’t mean what he said. He says he doesn’t even know the word ‘template.’ But it’s painfully clear that he did mean it, since he said the same thing any number of ways in the Reuters article.

This article was posted by Steve Gilbert on Tuesday, March 26th, 2013. Comments are currently closed.

2 Responses to “Cyprus ‘Bail-In’ Is/Isn’t Template For EU Banks”

  1. Rusty Shackleford

    In the end, the Europeans have awarded themselves a pseudo-monarchy with all their gerrymandering of “fairness” and “equality”. In microcosm, what captain vacation wants to do here.

    The national socialism of the Nazis and the outright communism of the Soviets proved to the politicians that they had to be more nuanced and subtle about it and use words like “investment” for taxes and “fairness” for things that allowed non-achievers to get stuff so they would support socialist politicians.

    So…they hath wrought it upon themselves by virtue of their own ignorance and fear of being labeled, which is the biggest human fear of all, apparently.

    After watching hundreds of movies where the protagonist is the one who is labeled, only to find, by movie’s end, that they really are the credible, respectable kind, it’s easy to see that that sort of steadfast character and solidity of person doesn’t really exist. At least, not anymore.

    Instead we have people like Graham, McCain and Boehner who talk a lot but in the end prefer to be popular with the “cool kids” instead of doing the necessary things because they fear the media and the derision of said “cool kids”.

    This is a pathetic attribute of humanity but, it has been historically consistent. From Rome, through the Dark Ages, the Renaissance and on to today. How odd it was, then 236 years ago for humans with extraordinary character to defy the most powerful entity on the planet and form a new country where people really were not given access due to status. But money became the new god, apparently and then politicians deified themselves, proclaiming themselves the only salvation of humankind.

    That sure has worked out well. No?

    • captstubby

      Patrick Leigh Fermor, a young Briton traveling in Germany shortly after Hitler came to power, met some of these men in a Rhineland workers’ pub, still wearing their night-shift overalls. One of his new drinking buddies offered to let Fermor crash at his house for the night.
      The walls were covered with flags, photographs, posters, slogans and emblems. His SA uniforms hung neatly ironed on a hanger…When I said that it must be rather claustrophobic with all that stuff on the walls, he laughed and sat down on the bed, and said: “Mensch! You should have seen it last year! You would have laughed! Then it was all red flags, stars, hammers, sickles, pictures of Lenin and Stalin and Workers of the World Unite!…Then, suddenly when Hitler came to power, I understood it was all nonsense and lies. I realized Adolf was the man for me. All of a sudden!” He snapped his fingers in the air. “And here I am!”…Had a lot of people done the same, then? “Millions! I tell you, I was astonished how easily they all changed sides!”

      Goldberg, Jonah.
      Liberal fascism


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