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| Cyprus: from now on, it is clear that bondholders are in the firing line | |
| (35 minutes later) | |
| In terms of pure principle, Jeroen Dijsselbloem is right: bondholders were never meant to be a protected species. They provide risk capital, and when those risks materialise, it shouldn't be the poor old taxpayer who picks up the bill. But bailouts such as Ireland's, in which bondholders didn't lose a cent, have fed the notion that this class of capital always gets paid in full. | In terms of pure principle, Jeroen Dijsselbloem is right: bondholders were never meant to be a protected species. They provide risk capital, and when those risks materialise, it shouldn't be the poor old taxpayer who picks up the bill. But bailouts such as Ireland's, in which bondholders didn't lose a cent, have fed the notion that this class of capital always gets paid in full. |
| The trouble is, the head of the group of eurozone finance ministers, in his post-Cyprus remarks, is signalling a shift in the authorities' approach. Ignore the later refinement of his remark, about Cyprus being a "model". His comment about "pushing back the risks" on to private investors will be heard loud and clear: bondholders are now in the firing line; and, after them, so are depositors. This creates all sorts of problems. Will the cost of capital rise for weak banks? Probably. Will big depositors now flee from Spanish and Italian banks and, who knows, even banks in Luxembourg? That is a real danger. | The trouble is, the head of the group of eurozone finance ministers, in his post-Cyprus remarks, is signalling a shift in the authorities' approach. Ignore the later refinement of his remark, about Cyprus being a "model". His comment about "pushing back the risks" on to private investors will be heard loud and clear: bondholders are now in the firing line; and, after them, so are depositors. This creates all sorts of problems. Will the cost of capital rise for weak banks? Probably. Will big depositors now flee from Spanish and Italian banks and, who knows, even banks in Luxembourg? That is a real danger. |