Introductory Statement by Jörg Asmussen, Member of the Executive Board of the ECB, in exchange of views with the Economic and Monetary Affairs Committee of the European Parliament on financial assistance to Cyprus —

If the sovereign had shouldered these massive recapitalisation needs, debt would have risen to 145% of GDP. This would have critically endangered public debt sustainability. At the same time, traditional ways of burden sharing by the private sector bank creditors were limited, given little junior debt outstanding in banks.

The Eurozone has an effective* traditional way of burden-sharing with non-depositor creditors?

In particular, it was decided to cover the capital needs of the two largest banks exclusively through the own contributions of uninsured depositors and senior and junior debt holders. The creditors of the two banks would not be made worse-off than they would have been in the case of liquidation, which would have been the alternative to the programme. 

The Eurozone has a criterion that bank debt writedowns can be justified as long as the creditors are not worse off than they would have been under liquidation?

If only Ireland had thought of these things in 2010!

[*i.e. that doesn’t endanger debt sustainability]

3 thoughts on “Treppenwitz

  1. “If the sovereign had shouldered these massive recapitalisation needs, debt would have risen to 145% of GDP”.

    Only 145%? That looks like a snitch. Italy will be at over 135% this very year, so it shoudn’t be long now before it gets there. To be followed by others. Everyone better hope that Abenomics works, or Italian deposit holders will be having the riot act read to them.

  2. Ireland made the silly law that depositors and debtors were equal. Once you do that, the rest of the path was laid in golden bricks …

  3. So here’s the rule: uninsured deposits in weak banks in weak eurozone countries are now bank capital. Presumably this will mean that deposits in Club Med banks will now receive the same risk-weightings under Basel as other forms of bank capital. Depositors in Spanish and Italian banks are now “investors” who are expected to do their homework with respect to both bank solvency and country credit. Makes perfect sense to me except for one thing: why would any rational Spanish business keeps its euros on deposit with a Spanish bank? Much safer to concentrate European cash management in Frankfurt or Amsterdam.

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