2013-03-31T15:44:00Z https://www.eurobull.it/Is-Cyprus-a-model-for-Europe-of-how-to-rescue-a-State,05664#comment16529 2013-03-31T15:44:00Z

<p>« In June last year, an EU summit for the first time agreed that the eurozone's bailout fund, the European Stability Mechanism, could be used directly to recapitalise ailing banks without the loans being added to government debt. »</p> <p>« Nevertheless the EMS would be the only European response to the crisis of a member states, but again the solution is sought at intra-national level with the Eurogroup unsure of its own position. »</p> <p>First of all I dont see what is so European about bailing out every bank, no matter what sort of economic model they have chosen and what sort of savers there are. Also the ESM is money, not comming from a blue heaven. Second I dont agree with your point of view, that it is only Germany, which is taking a view on a stricter bailout system, but that is also other countries like Austria, Finnland, Netherlands aswell as other East European countries. It is also not very European to put up this image of Germany being the only one, not wanting to play a European game, since it evokes one-sighted hatred-speach. With a strict limit of 100.000 (which is already a lot) I think it is highly exaggerated to draw a bank run on the wall. However I can agree to a small savers deposit insurance scheme within the Banking Union, but that cannot mean to bailout every bank and to forget about any sort of responsibility. People with 100.000 Euro are mostly thinking very well about there savings. Therefore they should also take the risk if they want to profit from risky investments. We can discuss the question of whether it would be contagious if you call it a sort of model. But if you look at the Cyprus case, there has been no reaction in Spain for example, which on the contrary managed to get bonds just some days ago for one of the best spreads since a long time...</p>

2013-03-30T12:23:35Z https://www.eurobull.it/Is-Cyprus-a-model-for-Europe-of-how-to-rescue-a-State,05664#comment16527 2013-03-30T12:23:35Z

<p>Hi Alessio ! Here are a few thoughts on some of your remarks :</p> <p>At first, the scheme of bail-ins in Europe has not been standardized. Any discussion on the « nature » or modalities of bail-ins is essentially established on rumours, inchoate truths, incomplete plans and a dose of speculation. It is certainly fair to suggest that the zeitgeist in Brussels (and Berlin) favors bail-ins. However, what is currently being contemplated upon, is to make this an integral part of the range of powers that will fall under the soon-to-be-established Single Resolution Mechanism (SRM). The SRM will complement the Single Supervisory Mechanism (SSM) that will on its own accord be integrated in the spectrum of duties of the European Central Bank, by 2014. This implies an institutionalization of the bail-in scheme ; one that will make the whole operations predictable, transparent and « European » (as contrasted to sub-optimal and arbitrary deals deriving from inter-governmental bargaining).</p> <p>Secondly, by « bail-ins » we ought to understand that deposits are in principle the last to be touched. Those who are forced to exchange debt for equity are senior bondholders, junior bondholders and then unsecured depositors. Those whose deposits are secured cannot be touched in principle and the fact that the original agreement of the Eurogroup on Cyprus did just that, shows, inter alia, the shortcomings of the inter-governmental modus operandi, not of the bail-ins per se.</p> <p>Concomitant with this is that bail-ins as contrasted to bail-outs do not protect those who ventured to speculate on the bank. Those who took the risk are those who bear the cost. In this regard, bail-ins are inherently heterogeneous as their anatomy is determined by the specific conditions that apply to each problematic bank ; whereas bail-outs apply without serious consideration of the specifics, and hence end up provided pampers to those who contributed to the failure in the first place. Bail-outs were hitherto preferred only because of their convenience in administrative terms, not their economic, legal and moral superiority (and also due to the fact that the Economic and Monetary Union's institutional architecture was inadequate and had no mechanisms for satisfactory and effective alternative action). That granted, bail-ins will eventually become the new orthodoxy, but they will differ substantially from the awkward deal on Cyprus (always with respect to the specific peculiarieties of the profoundly unsustainable Cypriot economic model).</p> <p>Thirdly, the ESM has limited funds and cannot just distribute them as if these are blank checks. The ESM is not a cornucopia, nor should it engender incentives to policy-makers to perceive it as such. The ESM will be the ultimate fiscal backstop once it is woven together with the Outright Monetary Transcactions of the European Central Bank. As such, it ought to be inferred that the ESM has a very important function to perform, but it is not that of a « generous » supporter of failed business practices.</p> <p>Lastly, for the above to be placed in a coherent institutional framework, there eventually needs to be further integration towards a genuine banking union, featuring a single deposit guarantee scheme ; and eventually other fiscal measures that will preempt or at least ameliorate any asymmetric shocks that can otherwise be fostered in a flawed polico-institutional context.</p>