It’s sunk costs all the way down

Important Wall Street Journal article reporting that the ECB has changed its position on whether senior unsecured bondholders in insolvent banks can be bailed in:

The ECB’s new stance can also be explained by the different scenarios, including the existence of a bank-restructuring framework for Spain that didn’t exist for Ireland, and the fact that the Irish government, unlike Spain’s, guaranteed much of its banks’ debts.

But a chief reason [finance] ministers decided not to make more privileged bondholders take losses was the Irish precedent, two people said. Dublin has had to pump more than €60 billion, equivalent to around 40% of its annual gross domestic product, into several struggling lenders, forcing it to request a €67.5 billion bailout from other European countries and the International Monetary Fund in 2010.

Forcing senior creditors to take losses in Spain would have raised more questions in Ireland about why taxpayers were forced by the EU to take on the huge burden of repaying high-ranked bondholders.

So: Ireland’s critical error was to protect legacy bondholders who were completely stuck (the money was long since lent), but now that Ireland made that error, we can’t let Spain come up with a better policy because then there would be questions about Ireland.

8 thoughts on “It’s sunk costs all the way down

  1. Well, as the FT noted, when the eurozone’s leaders attended the recently ended football championships, it was a chance for them to see people scoring in the other teams’ goals, for a change.
    Would a collision between these leaders and a post be a meeting of the minds, or does it just seem that way?

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  3. Pingback: FT Alphaville » The bail-in Spain — ECB edition

  4. Pingback: Because Ireland fucked up we have to fuck up Spain

  5. Basically I think the underlying issue is the political hot potato which the subordinated debt and preference shareholders constitute in Spain. Simply wiping them out when you liquidate a bank would not be acceptable. Basically, the government would end up having to compensate them out of public funds, so it becomes cheaper to pass a law protecting them. Which means you need to hit seniors.

    Basically banks and cajas sold these products to their own clients when they were shut out of financial markets. The purchasers were sold them without understanding the issues as low risk products, a procedure which has since been described as incorrect by EU Commissioner Joaquin Almunia, Economy Minister Luis de Guindos, and PM Mariano Rajoy. As a result the holders of these instruments are starting to win restitution cases before judges (with witnesses like the above-mentioned trio, who could possibly lose?) and the trickle is about to become a flood.
    In fact protests by small savers are arguably more of a political threat to the present government that union activists calling for a general strike against the austerity measures.

  6. Pingback: The bail-in Spain— ECB edition

  7. Well, as the FT noted, when the eurozone’s leaders attended the recently ended football championships, it was a chance for them to see people scoring in the other teams’ goals, for a change.
    Would a collision between these leaders and a post be a meeting of the minds, or does it just seem that way?

  8. Pingback: Comment of the Day | Prog Gold