Germany Said to Seek Cyprus-Style Wipeouts in ESM Bank Aid Rules
Germany is leading a push for all bank creditors except insured depositors to take losses before the euro area's firewall fund could provide direct aid to troubled financial institutions, according to two European officials.
Euro-area finance ministers meeting in Luxembourg today are battling over what losses to require for private-sector creditors, particularly while the European Union sets up broader rules on how to restructure failing banks. The ministers are trying to agree on an outline for how banks can tap the 500 billion-euro ($660 billion) European Stability Mechanism without damaging their nation's balance sheets.
Germany, Finland and the Netherlands want to require senior creditors to take losses before ESM aid could be considered, according to the two officials. This contrasts with the European Commission's view that only junior bondholders and shareholders should be written down before state-funded restructuring can begin.
If the German effort is successful, it would mean that future bank bailouts within the currency zone would look more like the rescue terms for Cyprus, rather than the path taken by Ireland, Spain and the Netherlands. The debate shows that euro-area ministers remain divided over how to break the link between banking-sector and sovereign-debt struggles a year after they offered the prospect of direct ESM aid to calm market fears.
Eoin Treacy's view Fullermoney has long argued that a deposit insurance corporation similar to the USA's FDIC is an integral part of the nation building process currently underway within the Eurozone. Therefore, the only logical conclusion is that the approach to Cyprus's failed financial sector is a template we can expect to see implemented elsewhere in the event of bank failures.
However, this is unlikely to be greeted with enthusiasm by the area's financial sector since it removes the guarantee of rescue and ensures that at least some troubled institutions will be wound down. The Euro Stoxx Banks Index remains in an overall base formation and continues to fall towards the lower side. A clear upward dynamic will be required to stem the decline while a sustained move above 120 would be required to indicate a return to medium-term demand dominance.