Tuesday, 2 April 2013

EUROPE: ''Future Bailouts' model'': Dijsselbloem's proposal

Should the Cypriot bailout become a model for the future? The mere suggestion sent markets tumbling last week. But increasing numbers of European politicians would like to see bank shareholders and investors bear a greater share of crisis risk. The EU may be changing its strategy.

Since the collapse of Lehman Brothers in 2008, it has primarily been EU taxpayers who have assumed liability for the fallout. The advantages were enjoyed not only by actors on the global financial markets, but also by major banking centers, such as those in Luxembourg and London, which could count on seeing governments prop up teetering financial institutions. But a growing number of politicians and experts are demanding an end to this arrangement.

The EU currently guarantees all deposits under €100,000, but this policy was called into question two weeks ago after the finance ministers of the euro zone decided to make small-scale savers contribute to the bailout of the Cypriot banking sector. Ultimately, Cyprus issued a one-time levy only against depositors with €100,000 or more in their accounts, the first time that personal bank accounts have been hit in Europe as part of a formal bailout package.

Earlier last week, Euro Group President Jeroen Dijsselbloem sparked an enormous controversy after stating that the solution found in Cyprus could be applied throughout the euro zone in the future. Under his plan (proposal) deposits of up to €100,000 would be excluded from any loss participation at a bank. Any deposits over that amount would only get hit if the losses couldn't be fully covered through a bank's shareholders and other creditors.

The remark triggered immediate criticism from his predecessor as head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker. "It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans," Juncker said.

But in the European Parliament, politicians are considering ways to make banks bear greater responsibility for their own financial problems. Lawmakers are considering the European Commission's proposed banking resolution legislation for faltering financial institutions. The discussion includes the possibility of future compulsory levies on major depositors, although it is more focused on placing greater responsibility for risks on other investors in banks.

In Luxembourg, leaders are warning that applying the Cypriot bailout model -- a levy on bank deposits -- to other crisis-plagued countries could lead to a flight of investors from Europe. But the EU is considering the option anyway. Luxembourg Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.

In the case of Cyprus, European leaders have demonstrated for the first time that the burdens can be distributed differently. Laiki Bank, the country's second-largest financial institution, will be dismantled, and the remaining private shareholders of the already largely nationalized bank and its creditors will shoulder its losses. But the plan also calls for bank customers with large deposits to share in the pain for the first time: Deposits above €100,000 will be drawn on to help cover the bank's losses.

But forcing private creditors to participate in bailing out faltering banks has, to be sure, triggered worries about the possible flight of capital from ailing countries. Bank customers and creditors could relocate (their money) from the weak to the strongest institutions.

Despite major opposition, backers of Dijsselbloem's strategy believe their chances are improving. This has prompted one German budget policy expert to call for implementing the rules for winding down banks by 2014 rather than the currently planned 2018.

In the end, however, one must conclude that, while Dijsselbloem's proposal may have been correct, it won't make it easier for EU leaders to resolve the euro debt crisis.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist

Photo-Credit: Wikip├ędia: Euro Group President Jeroen Dijsselbloem