Just when everyone thought that the Eurozone crisis was over and that Europe’s major concern was now the refugee crisis, a plan by the German Council of Economic Experts proposes that banks be bailed-in should losses occur from a sovereign default before the European Stability Mechanism steps in to provide financial support.
The bail-in scenario was put into motion during the eruption of Cyprus’ debt crisis, but it has not been advocated as a general European policy until now.
According to the plan proposed by the German Council of Economic Experts, which is designed to protect German tax payers from excesses of fellow European neighboring countries’ national banks, European banks holding European sovereign debt may have to take “haircuts” and be part of bail-in plans should that same debt default.
Professor Peter Bofinger, a Keynesian economist who sits on Angela Merkel’s German Council of Economic Experts dissented, saying that the plan is “the fastest way to break up the Eurozone.” Bofinger believes that this plan might force countries like Italy and Spain, whose banks hold a vast amount of their government national debt, to depart from the euro in order to prevent their countries from facing bankruptcy.
Boginger also feels that this plan might ignite a bond run and lead to catastrophic results for the European sovereign debt regime.
As for Greece, which remains shut out from international credit markets, the bail-in plan proposed by the German Council of Economic Experts might make it impossible for the country to borrow again from private markets any time in the foreseeable future.
(Sources: The Telegraph; Hedge Zero)
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