A Word Out Of Place Sends Europe Tumbling

Tyler Durden's picture

Perhaps the best example of a "word out of place" comes from the new Eurogroup head, Dijsselbloem, also phonetically known as Diesel-BOOM, who just may have ushered in the next, next wave of the Eurozone crisis:

  • "Cyprus a Template For EU"

Er... wasn't it a special case, inside a unique case, wrapped in a one-time case? We will ignore the rather hilarious Freudian slip, and focus on what he was explicitly talking about with Reuters, which is the resolution model which was just put in place in Cyprus:

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, 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.

 

After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits - those below 100,000 euros - moved to the Bank of Cyprus, the country's largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.

 

Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalised. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.

 

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 punchline:

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 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.

 

Then, euro zone leaders agreed that the bloc's future rescue fund should be allowed to recapitalise banks directly, thereby breaking the debilitating link between teetering banks and weak governments forced to bail them out. That may now never happen.

 

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."

Translation: it now officially sucks to be an unsecured creditor in Europe. In other words: an uninsured depositor.

Why this ad hoc dramatic shift in the European approach to bank solvency, which if anything makes the link between bank and sovereign closer than ever, and crushes all that Draghi achieved in the summer of 2012?

Simple: because what Cyprus allowed was the effective usurpation of democracy - the only reason the Cypriot bailout "passed" (at least so far) is because it was structured as a bank restructuring, a financial system "resolution", not a tax, and thus not in need of a parliamentary, democratic vote. Because as Cyprus also showed, votes to deprive depositors of cash, whether insured or uninsured, simply won't fly.

Hence the shift.

However, there is a problem: it means that depositors are now fair game everywhere, and that the ESM or EFSF, with their unlimited scope but "democratic" impleention pathway, are on the backburner.

And now, the scramble to pull uninsured deposits out of banks everywhere begins. Thanks to the new Eurogroup head.

"You ask for miracles, Theo. I give you Diesel-BOOM"

And now, every European depositor is going to their local financial dictionary to look up the definition of General Unsecured Claims, only to see a picture of... themselves.