by John Galt
July 8, 2016 23:00 ET
On January 1, 2016 the new bail-in rules became the rule of law for the member states of the European Union.
Hugo Dixon penned a column for Reuters on January 4th which revealed how tough the terms were for the bail-in protocol (excerpted):
The European Union entered a brave new world of bank “bail-ins” at the start of 2016. Europe has wasted so much taxpayers’ money on bailing out bust banks in recent years that it is right to try to get investors to help foot the bills in future. However, the tough new regime carries big political risks.
The key new rule is that no bank can be bailed out with public money until creditors accounting for at least 8 percent of the lender’s liabilities have stumped up. So-called bail-ins typically mean wiping out creditors’ investments, slashing their value or converting them into shares in the bank. Uninsured depositors could get caught along with professional investors.
Moreover, within the euro zone, national authorities will no longer be responsible for dealing with bust banks as this job has just been transferred to the new Single Resolution Mechanism.
Although the threshold for uninsured depositors is currently set at €100,000, there is nothing that prevents the European Central Bank or authorities within those nations from lowering that level should the severity of a banking crisis intensify. While this would not be an issue for a major EU member nation like Germany should Deutsche Bank run into difficulties, a nation like Italy which is now buried with a major banking crisis could cause a political revolution and total economic collapse.
To get a better perspective from an investor’s point of view, I suggest reviewing the only nation to endure a “bail-in” within the EU/ECB structure before this year.
The results are best expressed by their stock market and the last quote as of the close of trading today:
No more comment is necessary as the Cypriot stock market is no longer a functioning entity from an investor’s perspective.
The European Union must now decide to either enforce their rule of law, which will cause a political revolution far worse than Brexit inside Italy, or accept the fact that a massive bailout which will further suppress price discovery and increase risk for the future within the monetary union is achieved. Either way it would appear that Brussels and Rome are going to be the big losers.
Which means Wall Street will feel this pain also.