Pawel Morski takes a look at the bail-in regime being proposed by Jeroen Dijsselbloem (the Dutch finance minister/spelling nightmare who heads up the euro zone’s Eurogroup of finance ministers). He likes the principle (as he should), but (as he should be) is skeptical over the timing:
However, there are two important problems here 1) depositors over €100,000 control enough money to overturn the European economy if they stampede; 2) there’s – to a fairly fine level of precision – zero evidence that the people in charge know what they’re doing. In short, the last thing the Eurozone needs right now is uninsured depositors thinking hard about the prudence of their investments.
…To suggest that the bailin legislation is a problem for the periphery and uninsured depositors is to say that the fire is downstairs. The FDIC is the chosen comparison for the optimists. But the FDIC works best with small banks (of which Europe has comparatively few); when Wachovia, Citi and Bank Of America ran into trouble, the FDIC was not left to do its job. And the US banking sector assets are around 80% of GDP, vs around 3x that for the Eurozone.
To raise the issue of depositor bail-ins now – five years ahead of schedule and with nothing in the way of a resolution regime would show impressive hubris had the Cyprus operation gone well. It didn’t. It was a complete disaster. If I had been in charge of European policy for the last week, I’d like to think I’d be suicidally depressed. I would be stuck in bed with a bottle of vodka, refusing to emerge unless finally coaxed out by someone willing to lie that the Cypriots would be willing to forgive me. From undermining the EUR100,000 deposit guarantee, to wiping out and freezing business working capital, to hammering businesses ahead of the April VAT payment, the execution alone is crammed with unforced errors. A politically stupid plan, rejected by an equally culpable Cypriot parliament, was replaced with a worse one has inflicted massive, irretrievable destruction on the economy of Cyprus. There’s a great deal to be said for commercial experience and gradual rollout. If Coca-Cola had tested a new product that killed 10% of the focus group, it’s reasonable to assume that they’d hesitate with the global rollout of Cyprus Cola. Instead, Mr Dijsselbloem is clapping the dust off his hands, announcing that he thinks this all went rather well, and looking to have another crack somewhere else. And it appears he’s decided to start with further scaring already skittish large depositors….