Greek example highlights drawbacks of hard and fast rules
Customers wait to enter a Eurobank Ergasias bank branch in Athens in July. Uninsured deposits in Greek banks were spared in the country's latest bailout. PHOTO: BLOOMBERG NEWS
The bailout deal for Greece added another chapter to the eurozone’s struggles to limit the costs of saving broken banks. But the bloc's new, stricter rules on imposing losses on banks’ investors and creditors mean that the flexibility shown to Greece, where economic concerns trumped political considerations, might not last.
At their meeting last Friday, eurozone finance ministers decided that shareholders and subordinated and senior creditors in Greek banks would be “bailed in,” or lose their claims, before any public money could be used to recapitalize the banks. Uninsured deposits, which include household savings above €100,000 ($111,000) and corporate bank accounts, however, would remain untouched.
“This is a meaningful victory for economic sanity,” says Nicolas Véron, a visiting fellow at the Peterson Institute for International Economics in Washington.
There is no public data on how much of the €159 billion in deposits that were left in Greek banks when capital controls were introduced at the end of June is uninsured. But European officials say that during the months of uncertainty over Greece’s financial future the vast majority of individual savers had drawn down deposit accounts above €100,000. Left exposed were small and medium-size companies, which need money in the bank to pay suppliers and salaries.
Bailing in those accounts would have delivered another painful blow to Greece’s already-battered economy, pushing up bad loans that in turn would have required lenders to boost their capital buffers even more.
It would have been “taking with one hand and having to give with the other,” says a European official.
The decision to spare those accounts stands in contrast to the 2013 bailout for Cyprus, where uninsured depositors had to give up almost half their savings. It also falls short of strict European Union bank restructuring and resolution rules that require the “bail in” of uninsured deposits.
While this legislation, known as BRRD, doesn’t come fully into force until January, eurozone finance chiefs had previously made clear they would push for early implementation in cases where European taxpayer money was involved.
That Greece would be different wasn’t a foregone conclusion. Eurozone governments were eager to limit the bailout’s €86 billion tab, €25 billion of which has been set aside for recapitalizing banks. And in negotiations leading up to last week’s deal, Germany and Austria—at times with the support of the Netherlands and Slovenia—favored uninsured depositors taking a hit, according to European officials.
It required an intervention by European Central Bank PresidentMario Draghi to convince ministers that depositors should be spared this time around, these officials say. Mr. Draghi also argued that this decision needed to be communicated clearly now, rather than after a round of stress tests uncovers the banks’ actual capital needs by the end of this year.
For the EU’s broader struggle with the question of how to deal with failing banks, this decision sends different and somewhat contradictory signals.
It is a sign of how far the bloc has come since 2008, when banks were bailed out in almost every country, with even shareholders often walking away without losing their claims. A first push against this regime of cautiousness came in 2010, when Irish demands to impose losses on bondholders in their own failing banks were squashed by then-ECB President Jean-Claude Trichet, who feared such a move would spread panic across Europe’s financial system.
The 2012 rescue deal for Spain established a new order. Shareholders and subordinated creditors were bailed in. Mr. Draghi noted that in the worst cases, where banks were so broken that they needed to be wound down, even senior bonds would no longer be sacrosanct.
It took until the next spring, and a huge banking crisis in tiny Cyprus, for that taboo to fall, taking with it the unwritten rule that even uninsured deposits were safe in the currency union.
That the coming bail-in of senior bonds in Greek banks went largely unnoticed on financial markets indicates that investors are now prepared for losses—at least when it comes to poor eurozone governments that don’t have the money or clout to bail them out.
“This gives an indication of the considerable change that has occurred in Europe,” says Mr. Véron.
At the same time, the Greek example highlights the drawbacks of setting hard and fast rules on bank restructuring. Once the bloc’s new bail-in rules become legally binding next year, political deals to protect uninsured depositors will be more difficult to seal—especially with growing demands for such action from powerful countries such as Germany.
EU finance ministers and parliamentarians spent two years wrestling with the question of how strict the new bail-in rules should be. The result was a loophole that allows some liabilities, such as uninsured deposits, to be spared to preserve financial stability—but only after losses have been imposed on at least 8% of a bank’s total liabilities, including capital.
In Greece, that could have meant cuts to deposits of as much as 39%, according to calculations by Brussels-based economic-policy think tank Bruegel.
Guntram Wolff, the director of Bruegel, believes that countries where the entire banking system is in crisis may still get special treatment. But, he warned, “it will be harder to make this kind of exception” under the new rules.
