Market euphoria and soaring demand for European bank debt could be brought back down to earth if the EU pushes ahead with the early introduction of rules allowing Cyprus-style raids on bank creditors and big depositors.
Following demands from Germany, the EU law to raid the bondholders and savers of failing banks could take effect as soon as Jan 2015, three years earlier than planned and in time to hit banks exposed by ECB tests next year.
An early start date has won support from the ECB, uneasy over banks’ reliance on its support. Jens Weidmann, the president of Germany’s Bundesbank, this week became the latest policymaker to join the chorus of support.
Investors have been buying up bank bonds to make up for otherwise feeble investment returns in an era of record low interest rates. The market mood has picked up so much that hedge funds and others are even ready to invest in Greece, the country at the deep end of the eurozone debt crisis.
The so-called bail-in of creditors could, however, revive the worst memories of the debt crisis and mark the currency bloc’s biggest upset since a rescue of Cyprus earlier this year broke a taboo by imposing losses on big savers.
The prospect of the new law has done little to curb enthusiasm for bank bonds; Spanish banks have sold €22bn of unsecured bonds since the start of last year. Nor has it prompted large savers to move their cash to safe havens.
The power to impose losses on bank creditors is the most market-sensitive part of banking union. Germany wants its early introduction in return for giving its full backing for the project to police and support banks in the eurozone.
Berlin wants the rules available for next year’s ECB health checks, allowing losses on bondholders or large depositors of banks with skeletons in their closet.
“I hope that serious investors know what they are investing in,” said Gunnar Hokmark, a member of the European Parliament who plays a central role in shaping the new law.
“Everything is to be seen as bail-in-able. Depositors are, in the end, bail-in-able. If anyone would be surprised by that, they have been away from the debate for quite a long time.”
Originally pencilled in for 2018, these rules will be finalised and possibly accelerated by EU countries and the parliament in the coming weeks.
There is a lot at stake. Banks across the eurozone have €860bn of unsecured bonds, with German banks accounting for almost €200bn, according to Reuters.
Banks in Spain and Ireland are selling billions of euro of bonds — Irish banks have issued almost €750m of bonds over roughly the past year — despite uncertainty over their true health.
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