Mattresses across Europe are going to get a little bit fatter on this news.
The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.
“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’,” he said.
“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.”
Ditching a three-year-old policy of protecting senior bondholders and large depositors, over €100,000, in banks, Mr Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts.
“If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on,’” he said.
“The consequences may be that it’s the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take.”
The announcement is highly significant as it signals the mothballing of the euro’s €700bn bailout fund, the European Stability Mechanism (ESM), which Spain and Ireland wants to be used to recapitalise their troubled banks.
There’s a fundamental immorality to this tactic. Most of the accounts that would be raided don’t belong to anyone who made the investments that weakened the banks. They belong to people who parked their earnings in banks for one reason or another, but never contemplated that their money would be used to pay off someone else’s bad debt. Now they have been warned and given an incentive to pull all of their money out and park it elsewhere. So bank runs across all of Europe are a real possibility.
Dijsselbloem is now blaming the uproar on translating his statement from Dutch to English, or something.
On Dutch TV last night: “Dijselbloem said he didn’t even know the English word “template” so he maintains he couldn’t have used it”.
— Faisal Islam (@faisalislam) March 26, 2013