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Draghi to the EU Commission: Freeze the Bail-In — for the Time Being
24 October 2013
(EIRNS)—The announced strategy of bail-in procedures to save banks has evidently so scared investors already, that the ECB is now asking the EU Commission to freeze bail-in procedures — for the time being. ECB President Mario Draghi sent a letter to EU Commissioner Almunia on July 30, which was supposed to remain secret. It was leaked to La Repubblica, and eventually Bloomberg got hold of a copy.
Draghi’s letter was written at the time when EU Commissioner Almunia was ordering Monte dei Paschi (MPS) to bail in bondholders as a condition to approve the EU4.1 billion government loan issued by the then-government of Mario Monti. MPS indeed defaulted on interest rates on three subordinate bonds. In his letter to Almunia, Draghi says: "An improperly strict interpretation of the state aid rules may well destroy the very confidence in the euro area banks which we all intend to restore." Draghi called for "precautionary recapitalization" that would dilute shareholders without hurting junior bondholders, and for government "backstops," according to Bloomberg. "It is essential that member states commit credible public backstops to ensure that resources are available in case private sources of capital are insufficient in the face of capital shortfalls. The absence of a public commitment would undermine the credibility of the exercise from the outset." On Oct. 19, La Repubblica had first leaked the letter, writing: "According to several people with direct knowledge, Draghi’s letter to Brussels contains a basic message: We must avoid forcing losses on those who have invested in bank bonds, at least for the moment, lest this should destabilize the financial system in Europe." "The ECB president is not against imposing losses on bank creditors once the European banking union is operating at full speed. Draghi, however, fears that imposing losses on bondholders now, potentially for dozens of European lenders at once, can destabilize the markets." The ECB has started its review of bank assets, following the final decision on the Single Supervisory Mechanism by the Ecofin on Oct. 18. The plan is to come up with a figure for bank losses which must be covered by capital increase and government aid. The fear is that at this phase, bail-in rules would frighten investors. The situation of Italian banks, among others, is especially delicate. "In Brussels, someone remarks that with his letter, Draghi has abandoned his neutrality in defense of Italian interests. Surely, the ECB president has a different view, but he knew this risk existed and also because of that he wanted to keep it secret. The fact that he nevertheless acted, shows the dimensions of his concerns." [CCC] |