When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives

When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives

One of the big lessons of the fraught negotiations over bailing out (or more accurately, in) Cyprus’s banks is that deregulating institutions with an implicit or explicit state guarantee is a bad idea. You’ve just given them a license to gamble with the public’s money, and you can rest assured that they will eventually avail themselves of it.

In Cyprus, bank deposits, which in theory are senior (meaning everyone else who gives money to the bank gets wiped out before they lose a penny) are proving to be not so. The reason is that there isn’t much left in the way of equity, there is pretty much no subordinated debt. The senior debt (still junior to deposits) is mainly sovereign or central bank debt. The Germans are insisting on “private sector participation” which means someone other than central banks need to take losses. Joseph Cotterill of FT Alphaville described why the officialdom decided it was too hard to go after the non-central bank bondholders:

As it is, there were lots of good reasons why a sovereign debt restructuring did not happen. I don’t want to downplay them. Notably, the fact that the bonds that were best to restructure were governed under English law, and were likely held by the kind of investor who’s willing to litigate. I listed the problems here. Around it all was the inability to get write-downs out of Cypriot domestic-law sovereign debt, because that was held by the banks which already bore big black holes in their balance sheets. Again we come up to something that could be raised in the defence of the deposit levy — local exposure was so great everywhere, that any distribution of losses would have been painful. For the widow depositor, substitute the pension fund holding local-law bonds.