Italy Joins the "Bail-In" Bunch

Phoenix Capital Research's picture

Italy has now joined the “bail-in” crowd.

Monte dei Paschi di Siena is to be rescued by the Italian state using a new €20bn bailout package, as a last-gasp private sector rescue plan for the world’s oldest bank looked set to fail, forcing losses on bondholders.

The government rescue, which had long been resisted in Rome, is designed to draw a line under the slow-burn crisis in Italian banking that has alarmed investors and become the main source of concern for European financial regulators.

            Source: Financial Times

In this particular case, the bail-in will use bondholders’ money. But depositors will be on the hook in future cases in Europe.

Those who are shocked by this development are not paying attention. The template for this manner of dealing with financial issues was first laid out in Cyprus in 2012-2013.

Anyone who wants to understand how the next global banking crisis will unfold should take heed.

The quick timeline for what happened in Cyprus is as follows:

·      June 25, 2012: Cyprus formally requests a bailout from the EU.

·      November 24, 2012: Cyprus announces it has reached an agreement with the EU the bailout process once Cyprus banks are examined by EU officials (ballpark estimate of capital needed is €17.5 billion).

·      February 25, 2013: Democratic Rally candidate Nicos Anastasiades wins Cypriot election defeating his opponent, an anti-austerity Communist.

·      March 16 2013: Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.

·      March 17 2013: emergency session of Parliament to vote on bailout/bail-in is postponed.

·      March 18 2013: Bank holiday extended until March 21 2013.

·      March 19 2013: Cyprus parliament rejects bail-in bill.

·      March 20 2013: Bank holiday extended until March 26 2013.

·      March 24 2013: Cash limits of €100 in withdrawals begin for largest banks in Cyprus.

·      March 25 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).

The most important thing I want you to focus on is the speed of these events.

Cypriot banks formally requested a bailout back in June 2012. The bailout talks took months to perform. And then the entire system came unhinged in one weekend.

One weekend. The process was not gradual. It was sudden and it was total: once it began in earnest, the banks were closed and you couldn’t get your money out (more on this in a moment).

There were no warnings that this was coming because everyone at the top of the financial food chain are highly incentivized to keep quiet about this. Central Banks, Bank CEOs, politicians… all of these people are focused primarily on maintaining CONFIDENCE in the system, NOT on fixing the system’s problems.

Indeed, they cannot even openly discuss the system’s problems because it would quickly reveal that they are a primary cause of them.

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

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JBPeebles's picture

Good on the Cyprus thing. I hadn't thought about the speed of change once it was released.

The connect to Italy is relevant as the Establishment will claim because nothing is happening now there's no risk of collapse, all the while holding back the truth which would be that the banks are insolvent, and if you do demand all your money back, they won't have it.

The mindset carries up until the collapse, when it dictates that they'll call the bank holiday only when the sound of crunching rocks into the ship's hull is too loud to ignore and pleas to "return to your cabins" go ignored.

The length of time it takes to go from wanting help--a bailout--to losing total control may be a while--in Cyprus' case 6 months. But when it hits, the only options are to nationalize or bail out/bail-in.

This is a lot like a chronic debtor who exhausts their credit. Until the first denial, they'll do everything to make it seem like they're creditworthy. It's an act as many spouses have found out when they discover some hidden statement or not, only to later discover that their credit has been trashed.

Rearrange the deck chairs on the Titanic. Avert one crisis by delaying it. Then your successor can blame you for it. Hardly original but so appropo.

Like seeing ZHers post on the Italian banking crisis. Many have experiences there, and enjoy musing on the cultural divide between northern and southern Italians.

 

globalintelhub's picture

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wcvarones's picture

Dude, you've been overtaken by events.  The state bailout is now supposedly back on.