The EU Bail-In Directive: Dark Clouds Are Gathering
Submitted by Pater Tenebrarum via Acting-Man.com,
Portugal’s Rickety Banking System
After the unseemly bankruptcy of the Espirito Santo Group and the associated bank, then Portugal’s second biggest (likely a result of not praying enough, see: “Big Portuguese Bank Gets Into Trouble” and “Fears Over Banco Espirito Santo Escalate” for the gory details), Portugal’s state-run deposit insurance fund basically ran out of money.
It turns out that Europe’s new Bank Recovery and Resolution Directive (BRRD for short) came just in time for Portugal. At the end of 2015, another Portuguese bank bit the dust, the country’s seventh largest lender by assets, Banif. Portugal’s government once again decided to bail the bank out, but with strings attached. Subordinated bondholders and shareholders were essentially wiped out, which is as it should be.
Banif SA, weekly. Although this is hard to see on this linear chart, the stock rose by 40% today, to €0.002. Shareholders are allegedly planning to throw a wild party in Lisbon over the weekend (we were unable to confirm this rumor) – click to enlarge.
Senior bondholders and depositors were spared however, with Portugal’s overburdened taxpayers once again footing the bill. According to the FT:
Portugal has agreed a €2.2bn state rescue for Banco International do Funchal (Banif), splitting the Madeira-based lender into “good” and “bad” banks and selling its healthy assets to Spain’s Santander for €150m in the country’s second bank bailout in less than 18 months.
António Costa, Portugal’s new socialist prime minister, said the bailout would involve “a high cost for taxpayers” but had the advantage of being “a definitive solution”. Branches would open normally on Monday, he said. The rescue, which “bails in” shareholders and subordinated creditors, follows the €4.9bn bailout in August last year of Banco Espírito Santo, once Portugal’s largest listed bank, whose healthy assets, split off into Novo Banco, remain unsold.
In a statement late on Sunday night, the Bank of Portugal said the rescue of Banif would involve “total public support” estimated at €2.25bn to cover “future contingencies”, of which €1.76bn would come directly from the state and €489m from a bank resolution fund, to which all banks contribute. The bailout protects depositors and senior creditors and ensures that Banif’s operations, transferred to Santander Totta, the Spanish group’s Portuguese subsidiary, will continue to “function normally”, the central bank said.
Shareholders and subordinated creditors would be left in Banif, retaining “a very restricted group of assets” that are to be liquidated, the Bank of Portugal said. “Problematic assets” would be transferred to a special asset management vehicle. The rescue partly mirrors the 2014 bailout of BES, which was split into “good” and “bad” banks after its profits were hit by exposure to the heavily indebted Espírito Santo family business empire.
Banif is Portugal’s seventh largest lender with total assets valued at €12.8bn in June, equivalent to about 7 per cent of Portugal’s gross domestic product, and deposits totalling €6.3bn. The bank is the dominant lender in the Portuguese islands of Madeira and the Azores, where it accounts for more than 30 per cent of total deposits.”
(emphasis added)
Since no deposits were wiped out as a result of the bail-out, Portugal’s money supply won’t be affected. However, Banif’s downfall is a reminder that Portugal’s banking system remains quite rickety. We dimly remember someone saying that the bail-out of BES would be the last such problem. Evidently it wasn’t.
Still, there is nothing overly unusual here – the socialist prime minister decided that it would be better to spare senior bondholders and depositors and let taxpayers eat the losses, but at least it was decided to bail someone in. However, what happened next was a lot less benign.
Governments Trying to Subvert the Law
The first euro area government that has tried to subvert the law governing the relations between creditors and borrowers was that of Austria. It was recently ignominiously stopped from doing so by the country’s Constitutional Court, which declared the so-called “Hypo Alpe Adria Special Law” unconstitutional.
What the government tried to do in this case was to stiff certain classes of creditors in spite of the fact that their bonds had been guaranteed by the now essentially insolvent province of Carinthia. As one can easily imagine, this decision didn’t go down well with the affected creditors and they sued the government. Austria’s Constitutional Court rightly concluded that the government had attempted to subvert essential legal principles and repealed the law in its entirety.
Specifically, the court cited in its ruling that reversing the guarantees to bondholders was in conflict with the constitution, that the law represented an unacceptable breach of property rights and that it treated creditors holding guarantees unfairly by dividing them into different classes, in spite of the fact that they should be treated pari passu.
As deeply embarrassing as this ruling was for Austria’s government, the attendant sighs of relief of bondholders could be heard across Europe. By desperately trying to avert a bankruptcy of the province of Carinthia (an event for which no legal provisions exist!), the government had created a huge question mark over government debt guarantees all over Europe. If one government could get away with suspending them by legislative fiat, couldn’t all of them expected to do so if push came to shove?
The fancy HQ of the former Hypo Alpe Adria Group (now known as “Heta Asset Resolution”, which isn’t merely a “bad bank” but easily the “worst bank” ever) in Klagenfurt, Carinthia.
As a first test of the BRRD, the HAA special law turned out to be a costly failure. The cost cannot simply be measured in terms of the additional amounts the country’s taxpayers are now forced to fork over – the real cost is hidden, and comes in the form of lost trust. As the FT noted at the time:
“Germany’s VOeB association of public banks said that the law would have led to incalculable costs by undermining investor confidence in Austria. The country now faced “the considerable task of winning back the lost trust of national and international investors — which could be regarded as a Herculean task”, said Liane Buchholz, the VOeB’s managing director.”
Giving it Another Try in Portugal
But we know governments. We have already seen the lengths to which assorted Greek governments and the government of Argentina have gone in recent years to stiff their creditors. More recently, Ukraine got in on the act as well. So given the fact that the banking system, governments and central banks are engaged in a complex three-card Monte designed to fund welfare/warfare statism by issuing mountains of unsound and unpayable debt that “backs” an equally fast growing mountain of irredeemable “money”, we knew it would only be a question of time before someone tried to pull the same stunt again.
Who better suited for this task than Portugal’s new socialist government? Remember the bailout of BES and the creation of a “good bank” and a “bad bank”? Take a gander at the following chart from Bloomberg:
Five senior BES bonds that had hitherto been assigned to the “good bank” are reassigned overnight, without warning, to the “bad bank”. Bondholders lost 80% of their money between the evening of December 29 and the morning of December 30 – click to enlarge.
As Bloomberg notes, this is “setting a dangerous precedent” – indeed, it is not much different from the precedent almost set by Austria’s government. Here is the problem in a nutshell: the government, or rather the ECB, suddenly “discovered” – and this shouldn’t really surprise anyone – that the financial hole that has been torn into BES is actually gaping a lot wider than had been hitherto assumed. According to Bloomberg, this caused Portugal’s government to opt for instant expropriation – a new year’s surprise present for BES bondholders, so to speak:
“If you owned any of those five bonds on Tuesday, you were owed money by Novo Banco, the good bank. On Wednesday, you were told that your bonds had been transferred to BES, the bad bank. The Portuguese central bank selected five of Novo Banco’s 52 senior bonds, worth about 1.95 billion euros ($2.1 billion), and reassigned them — thus backfilling a 1.4 billion-euro hole in the “good” bank’s balance sheet that had been revealed in November by the European Central Bank’s stress tests of the institution.”
The core problem with this decision should be glaringly obvious: once again, the government is arbitrarily picking winners and losers. Senior bondholders are no longer treated pari passu – certain types of bonds suddenly seem to confer different property rights than others – in spite of the fact that all these bonds are part of the class of “senior bank bonds”.
There is in principle absolutely nothing wrong with bailing in bondholders – in fact, this is precisely the way to go. However, the essential principle that creditors holding instruments of the same seniority have to be treated equally is something the bond markets of the whole world are relying on. Without this principle, what point is there in creating different levels of seniority, which are attended by different levels of risk and hence involve different costs and rewards?
One wonders of course on what grounds precisely these five bond issues were selected and not any of the others. That’s simple, actually – as Bloomberg explains:
“It seems likely that Portugal’s choice of bonds wasn’t completely arbitrary; the documentation for the selected securities says they are governed by Portuguese law, rather than U.K. or U.S. law.”
In short, the government already knows it would lose its case in London and New York courts – because, naturally, the bondholders are preparing to sue. So it has picked bonds the covenants of which are governed by Portuguese law, in the hope that the courts in Lisbon will be sympathetic to acts of selective expropriation by the Portuguese government.
As Bloomberg remarks, the consequences of this decision are nigh incalculable – and bank bondholders across Europe are likely to once again hold their collective breath:
“Portugal isn’t the only country refurbishing its banking industry. Germany’s savings banks will need to bolster their capital in the coming months under the new EU rules, and the fourfold increase in bad loans held by Italy’s banks since 2008 means the central bank there has some housecleaning of its own to do. Consolidation — in the form of forced intermingling of stronger and weaker banks — is likely in both countries. Investors who own debt issued by German or Italian banks will no doubt reflect carefully on what just happened in Portugal.”
(emphasis added)
If we were holding any of these bonds, we’d shoot first and ask questions later. Surely if ever there was a time to get out of Dodge, this is it.
Conclusion
In principle, the BRRD, or “bail-in directive” as it is also known, is quite a good idea. The fact that lending money to fractionally reserved banks or even merely depositing it with them, involves risks needed to be firmly reestablished. One simply cannot expect that banks and their creditors will be bailed out by taxpayers at every opportunity. Besides, the admission that there are risks in banking that have hitherto been glossed over or have even been lied about was long overdue. However, Europe’s governments are now likely to find out that the current monetary system with its fractionally reserved banks is actually incompatible with this admission, so to speak.
By arbitrarily meting out unequal treatment to similar classes of creditors, they are unwittingly hastening this process of recognition. In that sense, we actually welcome the Portuguese government’s attempt to stiff certain BES bondholders (although we still regard the case as such as plainly illegal and contemptible). It will now become even more difficult to keep assorted banking zombies on artificial life support. A lot of unsound credit is likely to be liquidated faster than had been expected to date. Artificial credit expansion is going to become even harder to implement. Unfortunately none of this is going to keep governments from trying to confiscate as much wealth as possible in a doomed attempt to keep the unworkable system of “third way” socialist regulatory statism going.
In this context, we want to leave you with a few quotes by Ludwig von Mises, which go to the heart of matter and some of which we are convinced will once again turn out to be prophetic – especially the ones that proclaim that the so-called “mixed economy” is just as certain to fail as the communist economies were. (from: Bureaucracy, The Anti-Capitalistic Mentality, Human Action, Planned Chaos and Planning for Freedom).
“Sorry boys and girls, you will have to choose. You can either have capitalism, freedom, prosperity and personal responsibility,or you can have socialism, tyranny, poverty and ‘security’. You cannot have both.”
“The Welfare State is merely a method for transforming the market economy step by step into socialism.”
“An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.”
“The issue is always the same: the government or the market. There is no third solution.”
“Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.”
“Contrary to a popular fallacy there is no middle way, no third system possible as a pattern of a permanent social order. The citizens must choose between capitalism and socialism.”
(emphasis added)
Amen.
(16 votes)
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Sure, start the bail-in's, in Brussels.
LeGarde and Draghi first!
Governments & Banksters lie, cheat, steal and do whatever they may want in a pinch.
Mmm...:
1) Have three months of expenses at home in CA$H.
2) Stack those PMs! Until it hurts...
3) Bitcoin, land, guns & ammo as you see fit.
The first and most important is guns and ammo, as you can take whatever else you need if you use the guns effectively. Next is land. Then PMs. Cash or toilet paper, but equally effective.
I wondered when Greece would make it back on the stage.
jb
"In principle, the BRRD, or “bail-in directive” as it is also known, is quite a good idea."
Sure, if your name is Rothschild.
When a bank is insolvent and there are no private investors interested recapitalising the bank, there are 3 options
1. Liquidation: All shareholders are wiped out. Bank assets (loans) are sold off and depositors are repaid up to the insured limit and if any is left, is split between the bond holders.
2. Public Bailout: Governmet infuses the necessary capital and becomes a shareholder alongside the existing shareholders. Everyone else remains unaffected.
3. Bail-in: Current shareholders are wiped out and some part of deposits over insured limit and bonds are converted to equity.
Since Rothschilds are shareholders in banks, their preferred choice would be option 2, since they get wiped out in option 1 or option 3.
What is your choice anyway?
They're still fooling the sheep into believing its about 'economics' and 'government'.
Its about a bunch of criminals riding roughshod over the populace.
Ask - ' Who gets paid & who pays it ? '
And also ask - ' Who got bribed and who got threatened ? '
The Bank of England (2014) claimed “The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits”. What this means is that money is invented into existance out of thin air by banks through lending and then treated as deposits. This means banks can create all the money they need and so have absolutely no right to claim they need to take depositors money out of accounts. The Bail Ins are nothing but legalised theft of the Public wealth. This is a crime.
Amount of new money banks can create is limited by the new loans people/businesses are willing to take and the banks willing to grant. The borrower's promise to repay enters the assets side of the books and the deposits (created out of thin air as you say) on the liabilities side of their books. They cannot create new liabilities (deposits) without new assets (loans).
When some of the loans they made go bad, they are forced to write down the value of the assets. To balance their books, they are required to write down liabilities too. The shareholder capital appears on the liabilities side of the books and can be written down to match the loss in the value of the assets (loans), but this works only until the shareholder capital becomes zero. At that point the bank becomes insolvent and cannot continue operations unless it is recapitalised (bailout) or its other liabilities are reduced (bail in). The only other option is liquidation (where the losses to depositors and bond holders will be higher than in a bail in).
If people don't like government bailouts of insolvent banks, depositors and bondholders of the bank will take a hit. The only questions is whether the losses are more (bank liquidation) or less (bail in).
Banks can set up subsidiaries that they loan to, meaning they are unlimited in what they can lend.
That they can continue operating when they are technically insolvent should be obvious to everyone now-It is so widespread it is normal and has been going on for years. If banks had to account properly for their bad debts most would be underwater by a large amount.
'In principle, the BRRD, or “bail-in directive” as it is also known, is quite a good idea' - Wiping out shareholders and bondholders is fine, that's the way it's supposed to be when any business fails, however taking money from depositors, who are unwitting creditors, is not a good idea. Apart from that anyone dumb enough in this day and age to buy shares or bonds in a bank deserves to lose everything.
The core problem with this decision should be glaringly obvious: once again, the government is arbitrarily picking winners and losers...
arbitrarily my ass.
You keep using that word... [/Inigo]
I want to PUKE, when I hear anything from Jean Paul Juncker.
I'll NEVER forget September of 2012, when he blew up the Cable trade.
When things get serious LIE~~~!
Can there be any doubt that by the time this collapse is over, every government creditor will get stiffed.
You da man, Ludwig!
I somewhat disagree:
Government, as a Power Cult made up of irrational and ignorant, but organized, proto-humans into a single celled non-human organism, known as a Collective - has, a priori, its own agenda which depends on numerics for its Policy of Growth, which is, at the core understanding, survival, and for this, it feeds on the peoples, which it harvests, I repeat, it haerests, as Capital, albeit for its own purposes.
All governments are the same, hence when wars are fought, civilians are always the target (cannon fodder) and this is due to the fact that Power Cults, that is to say governments, gain all their Power from the numbers in their Collectives. Kill off the numbers and the Power Cult dies. This is the Object of War. The Reason for War, of course, is always Maximum Entropy.
http://verbewarp.blogspot.my/2013/04/to-be-or-not-to-be.html
On the other Hand, Human Beings do NOT need Government. Government consist of the organized vs. the unorganized, an extention of the feudal system of yore.
Therefore all the Human Being need is to create an organized system to manage the affairs of the populace. This can easily effected without creating Power Cults in the Collective mechanism.
Remember, Bureaucrats, a system which we inhereted from mideval times, obey thoughtlessly and sometimes efficiently, the procedure and pay no attention, nor care for the outcome. And electing leadersship from a lineup up of blood crazed and money lusting morons that, as Pimips, sell the peoples assets while enriching themselves at the direction of a primitive and barbaric relic of Banco (thrown off the steps of the Synagogue some 2 thousand years ago), is sheer insanity.
There is far more to life, than Taxes and Death; And Capitalism is the right of two or more human to exchange freely, without a middleman. What we have today is NOT Capitalism but the Harvesting of Human Productivity by a Banking System, defended by dumb assed, ignorant, "Economists" Priests.
I Propose then that - The Choice is between the:
1. Human beings vs, the proto-Humans and,
2. Organized Society vs organized scum and,
3. Sanity vs. Irrational harvesting by the Banking System
Acknowledging that today:
"Civilization today, is defined by Fear and Cowardice." (me)
http://verbewarp.blogspot.my/2005/02/fear-is-jailer-of-freedom.html
http://verbewarp.blogspot.my/2008/04/poverty-signature-of-failure.html
"All that needs to be said, has been said." Pallas Athena
"Imperare sibi maximum imperium est"
Lucius Annaeus Seneca
Ho hum
What do you "somewhat disagree" with? The choices?
Not only is there no such thing as a mixed economy, there is also no such thing as ownership. Ownership is and has always been a privilege backed by force wherein some lay claim to income from goods which they have not themselves created or produced but acquired by conquest or distortions enabled by the force of law or the law of force, whatever. The notion that there is some absolute difference between private control and the social matrix in which it is embedded is just confusion and ignoring historical facts.
Except for inconsequential assets like you jeans or toothbrush or things your own hands have wrought.
Exactly. Ownership is a social construct, exercised either through voluntary consent or by the use of force or the threat of it against those that don't consent voluntarily. Since the rules of ownership are completely arbitrary, however logical and just they may seem to those claiming it/consenting to it voluntarily, they are meaningless in the absence of force that can guarantee them against those who disagree with them.
This is bullshit. This isn't about socialism, that works perfectly well in countries where they have competent politicians and bureaucrats. It is about the failure of greedy and incompetent politicians and bureaucrats. First the howl used to be about communism. Now the howl is about socialism. The rich want capitalism, which has been shown to be a complete failure and easily titled in favor of those who already own too much wealth. If capitalism was the answer, the US, the most indebted country on earth wouldn't be in the situation it is in now. Capitialism becomes cronyism and cryonism is worse than socialism because under the disguise of 'effecient and fair markets' individuals, companies and whole countries are robbed blind through the manipulation of currencies, commodities, stocks and bonds using forward sales of holdings the seller doesn't even possess. And of course NOBODY every gets prosecuted. The bigger the crime the more likely it is that the criminal will get away with it. They don't want people to own gold and silver and they certainly don't want a PM backed currency. That would mean no more interest payments on debt, and it would mean that people would become freer and freer. People would think long and hard about whether they needed the most recent version of the X-BOX because spending real gold and silver, that is very hard to come by, is an important decision.
Ask yourself this question. Where did John Rockefeller, a nobody from Ohio come by 20 million to buy out all the small producers and put floor under the price of oil. He got it from the Rothschilds bank, that's who. He was hired to do a mission and he did it. One hundred years ago, in the guilded age it was the same thing. All the means of production were in the hands of a few mega wealthy individuals. The railroads, the coal mines, the oil industry, the banking industry. THe rich don't want competetition, it's bad for profits. They want complete control of all the means of production, no rules or regulations, a miniscule personal tax rate and a compliant Federal Reserve that produces capital for them on demand as debt that the little people have to pay interest on in the form of taxes. The rich would rather spent 100 million to save 50 million in taxes rather than just pay the taxes. There is no honor, no honesty anymore. They have created a world where everyone is fighting for scraps. They pit religion against religion, class against class, region against region, state against state (i.e. state supplied money for locating productive capacity, in other words a bribe), and country against country while they look through the catalog and imagine themselves on their new 400 foot world class yacht. Look at Libya. 140 tons of gold was stolen to fund ISIS in Iraq and Syria. Their favorite bankers, the Rothschilds, take care of delivery. It all stinks to high heaven.
The day I see the US start to follow the law and follow the proper rules of business is the day I might reconsider my position. But until then, I repeat. The heart of capitalism, the US, is the most crooked, evil, predatory, scummy repositiory of human shit there ever was.
Dark I will bite. First understand Capitalism died decades ago. Capitalism was replaced with Fascism. Looking at the US from that perspective I can agree with some of your comments.
Europe is just as corrupt as the USA. The only difference is europeans were brainwashed long ago. The core financial instutitions reside there and fucked Europe up a long time ago. Before the US was even a country. I think you may want to dig into some of your banking systems that have been around for over 2000 years my friend.
Ask yourself this Dark where did the Rotschilds reside and where were their banks located during this period.
This isn't about socialism, that works perfectly well in countries where they have competent politicians and bureaucrats.
No such animal.
I don't think of it as a Bail-In.
It's paying the Bankers a Bonus for the Priveledge of devauling your own money. Which is totally different to "Managing" you money and you paying fees and charges. On top of all those fees and charges, they will loan out the same dollar you put in, to at least 30 different people.
It's NOT Fractional Banking, it's Fraud, they're loaning out what they don't own.
ag is bain-in (& nirp) insurance! if it goes up in value so much the better but my stash is mainly for a greek scenario coming to a tbtp bank near you!
"There is in principle absolutely nothing wrong with bailing in bondholders – in fact, this is precisely the way to go."
Unless you are Greece or Argentina, in which case:
"We have already seen the lengths to which assorted Greek governments and the government of Argentina have gone in recent years to stiff their creditors."
Okey dokey.
The Ukraine was added in 2015, so who's gonna be the bottomless barrel of 2016? The EU is toast anyway because the paymaster Germany will sink into anarchy. Millions more on their way.
"There is in principle absolutely nothing wrong with bailing in bondholders – in fact, this is precisely the way to go."
Unless you are Greece or Argentina, in which case:
"We have already seen the lengths to which assorted Greek governments and the government of Argentina have gone in recent years to stiff their creditors."
Okey dokey.
Is there an echo in here?
"This isn't about socialism, that works perfectly well in countries where they have competent politicians and bureaucrats."
Surely you jest.
It was recently ignominiously stopped from doing so by the country’s Constitutional Court, which declared the so-called “Hypo Alpe Adria Special Law” unconstitutional.
So, why doesn't the USA have a constitutional court?
Pretty much a full time job just to keep up with the treasonous effluvia that Obama pulls out of his Chicago ass.
Unchecked capitalism eventually will lead to rogue capitalism leading to fascism. Unchecked Socialism will eventually lead to communism. Cause all these social systems have no checks and balances (when not monitored) against that most basic of human instincts: trying to boss everybody else.
bail-ins will be ineffective
impale-ins will work much better, start at the top of the pyramid
The global monetary system was designed by bankers for bankers and they get a cut at every step in the process of money creation.
https://www.hiddensecretsofmoney.com/videos/episode-4
They are given the privilege of creating money out of thin air (fractional reserve banking), which they can then lend out and charge interest on.
There is only one task they have to carry out and that is to lend the money prudently to people that can pay them back plus the interest.
Could it be any easier, with no manufacturing, supply and distribution chains to worry about?
What are bankers like at prudent lending?
“What is wrong with lending more money into the Chinese stock market?” Chinese banker recently
“What is wrong with lending more money into real estate?” Chinese banker last year
“What is wrong with lending more money to Greece?” European banker pre-2010
“What is wrong with a NINA (no income no asset) mortgage?” US banker pre-2008
“What is wrong with lending more money into real estate?” US banker pre-2008
“What is wrong with lending more money into real estate?” Irish banker pre-2008
“What is wrong with lending more money into real estate?” Spanish banker pre-2008
“What is wrong with lending more money into real estate?” Japanese banker pre-1989
“What is wrong with lending more money into real estate?” UK banker pre-1989
“What is wrong with lending more money into the US stock market?” US banker pre-1929
Globally incompetent at the only job they have to do.
Shouldn’t we be asking why bankers are so fucking useless rather than bailing them out?
in switzerland a referendum has been called last december to abolish the banking fractional reserve i.e. the unconstitutional power for private/commercial banks to creat money out of thin air. please spread the word and write about it.
People need somewhere to stash their money. Up until now the baseline for risk has been put your cash in the bank. If you are adventurous and you want more profit then invest it in the asset class of your choice but the default way to just park your money is in the bank.
If banks are not guaranteed safe anymore then the logical move is to take out all your money and keep it at home in a safe. Once governments ncourage this to happen then they are opening up a massive security problem. Everyone now quite understandably wants the means to defend their new home stash and fairly peaceful countries suddenly become like America.
Governments need to think this through a bit more.