Poland Nationalizes Retirement Accounts
Posted September 6th, 2013 at 8:30 AM (CST) by Jim Sinclair & filed under General Editorial.
Dear CIGAs,
I want to be absolutely sure that you have read this article:
Nationalization of retirement Account just occurred in Poland. It is shocking in that it has no compensation so far in this watershed event. Note how it is spun as an OVERHAUL of the retirement system.
=======================================================
Poland reduces public debt through pension funds overhaul
Wed, Sep 4 2013
* Reform moves bond assets from private to state fund
* Some equity assets to gradually move to state as well
* Changes seen reducing Polish public debt by 8 pct of GDP
* Funds say moves could be unconstitutional
* Warnings that private pension funds could be wiped out
By Dagmara Leszkowicz and Chris Borowski
WARSAW, Sept 4 (Reuters) - Poland said on Wednesday it will transfer to the state many of the assets held by private pension funds, slashing public debt but putting in doubt the future of the multi-billion-euro funds, many of them foreign-owned.
The changes went deeper than many in the market expected and could fuel investor concerns that the government is ditching some business-friendly policies to try to improve its flagging popularity with voters.
The Polish pension funds' organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.
Announcing the long-awaited overhaul of state-guaranteed pensions, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.
He said that what remained in citizens' pension pots in the private funds will be gradually transferred into the state vehicle over the last 10 years before savers hit retirement age.
The reform is "a decimation of the ...(private pension fund) system to open up fiscal space for an easier life now for the government," said Peter Attard Montalto of Nomura. "The government has an odd definition of private property given it claims this is not nationalisation."
Tusk said people joining the pension system in the future would not be obliged to pay into the private part of the system. Depending on the finer points, this could mean still fewer assets in the private funds.
"The (current) system has turned out to be built in part on rising public debt and turned out to be a very costly system," Tusk told a news conference.
"We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer."
MARKET FEARS
By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend.
Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of gross domestic product (GDP).
This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.
The private funds hold assets worth about one fifth of Polish economic output and are among the biggest investors on the Warsaw bourse. Players in the pension market include international firms such as ING, Aviva, Axa , Generali and Allianz.
Bonds make up roughly half the private funds' portfolios, with the rest company stocks.
Soon after Tusk unveiled his plans, the benchmark index on the Warsaw stock exchange was down 2.6 percent on the day.
"This is worse than many on the markets had feared," a manager at one of the leading pension funds, who asked not to be identified, told Reuters.
"The devil is in the detail and we don't yet know a lot about the mechanism of these changes, what benchmarks will be use to evaluate our performance... (It) looks like pension funds will lose a lot of flexibility in what they can invest."
Polish officials have tried to reassure investors, saying the overhaul avoids the more radical options of taking both bond and equity assets away from the private funds outright.
They say the old system effectively made Polish public debt appear higher than it really is.
UNCERTAIN FUTURE FOR FUNDS
Poland has a hybrid pension system at the moment; mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE.
The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.
"This may lead to the private pension systems shutting down," said Rafal Benecki of ING Bank Slaski.
Policy in Poland is still much more prudent than in many of its European peers. However, the reform could erode Poland's reputation under Tusk for steady financial stewardship.
In the past few months, the opinion poll rating of Tusk's Civic Platform party has, for the first time in years, slipped below that of the main opposition, the conservative Law and Justice Party.
Though the next election is not until 2015, some analysts believe electoral concerns are already influencing economic policy and pushing the government to find scope for spending.
http://www.reuters.com/article/2013/09/04/poland-pensions-idUSL6N0H02UV20130904?feed&
Posted September 6th, 2013 at 8:30 AM (CST) by Jim Sinclair & filed under General Editorial.
Dear CIGAs,
I want to be absolutely sure that you have read this article:
Nationalization of retirement Account just occurred in Poland. It is shocking in that it has no compensation so far in this watershed event. Note how it is spun as an OVERHAUL of the retirement system.
=======================================================
Poland reduces public debt through pension funds overhaul
Wed, Sep 4 2013
* Reform moves bond assets from private to state fund
* Some equity assets to gradually move to state as well
* Changes seen reducing Polish public debt by 8 pct of GDP
* Funds say moves could be unconstitutional
* Warnings that private pension funds could be wiped out
By Dagmara Leszkowicz and Chris Borowski
WARSAW, Sept 4 (Reuters) - Poland said on Wednesday it will transfer to the state many of the assets held by private pension funds, slashing public debt but putting in doubt the future of the multi-billion-euro funds, many of them foreign-owned.
The changes went deeper than many in the market expected and could fuel investor concerns that the government is ditching some business-friendly policies to try to improve its flagging popularity with voters.
The Polish pension funds' organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.
Announcing the long-awaited overhaul of state-guaranteed pensions, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.
He said that what remained in citizens' pension pots in the private funds will be gradually transferred into the state vehicle over the last 10 years before savers hit retirement age.
The reform is "a decimation of the ...(private pension fund) system to open up fiscal space for an easier life now for the government," said Peter Attard Montalto of Nomura. "The government has an odd definition of private property given it claims this is not nationalisation."
Tusk said people joining the pension system in the future would not be obliged to pay into the private part of the system. Depending on the finer points, this could mean still fewer assets in the private funds.
"The (current) system has turned out to be built in part on rising public debt and turned out to be a very costly system," Tusk told a news conference.
"We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer."
MARKET FEARS
By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend.
Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of gross domestic product (GDP).
This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.
The private funds hold assets worth about one fifth of Polish economic output and are among the biggest investors on the Warsaw bourse. Players in the pension market include international firms such as ING, Aviva, Axa , Generali and Allianz.
Bonds make up roughly half the private funds' portfolios, with the rest company stocks.
Soon after Tusk unveiled his plans, the benchmark index on the Warsaw stock exchange was down 2.6 percent on the day.
"This is worse than many on the markets had feared," a manager at one of the leading pension funds, who asked not to be identified, told Reuters.
"The devil is in the detail and we don't yet know a lot about the mechanism of these changes, what benchmarks will be use to evaluate our performance... (It) looks like pension funds will lose a lot of flexibility in what they can invest."
Polish officials have tried to reassure investors, saying the overhaul avoids the more radical options of taking both bond and equity assets away from the private funds outright.
They say the old system effectively made Polish public debt appear higher than it really is.
UNCERTAIN FUTURE FOR FUNDS
Poland has a hybrid pension system at the moment; mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE.
The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.
"This may lead to the private pension systems shutting down," said Rafal Benecki of ING Bank Slaski.
Policy in Poland is still much more prudent than in many of its European peers. However, the reform could erode Poland's reputation under Tusk for steady financial stewardship.
In the past few months, the opinion poll rating of Tusk's Civic Platform party has, for the first time in years, slipped below that of the main opposition, the conservative Law and Justice Party.
Though the next election is not until 2015, some analysts believe electoral concerns are already influencing economic policy and pushing the government to find scope for spending.
http://www.reuters.com/article/2013/09/04/poland-pensions-idUSL6N0H02UV20130904?feed&
06/27/2013 12:51 PM
Bail-Ins: EU Deal Protects Taxpayers in Bank Bailouts
Under an agreement reached early Thursday, European banks, their investors and depositors will be required to cover at least 8 percent of potential losses before governments step in with aid. It is a major step forward for the planned European banking union.
In the future, European banks, their owners and their creditors will be held accountable should financial institutions collapse -- and not just taxpayers.
European finance ministers on Thursday agreed to a deal that would require owners, creditors and depositors -- in that order -- to cover the expenses of bailing out or winding down failed banks. The reform marks another step towards a euro-zone banking union.
"We came to political agreement," German Finance Minister Wolfgang Schäuble said early Thursday morning. He said the reforms were an "important step," noting the shareholders and creditors would be "liable first and foremost."
Under the so-called "bail-in" deal, the result of what Schäuble described as "quite difficult and intense" talks, states would only intervene to rescue banks after all other actors, including depositors with more than €100,000 in their accounts, had participated to an extent representing at least 8 percent of total liabilities. The deal also would require member states to set up "ex-ante resolution funds," that would hold a sum equal to 1.3 percent of a nation's insured bank deposits. The banks themselves would be required to pay into these funds, but payouts in interventions would be cappped at 5 percent of a bank's total liabilities and would require approval from the EU in Brussels.
Germany Says Deposits Are Safe
With the new rules, the 27 EU member-states want to prevent taxpayers from getting stuck with the tab when financial institutions fail, as frequently happened during the recent global financial crisis. Schäuble said that depositors with less than €100,000 in their accounts would have nothing to worry about and that deposit guarantees would protect them not only in Germany, but also across the EU.
Meanwhile, Dutch Finance Minister Jeroen Dijsselbloem, who is also the head of the Euro Group, said the rules would lead to more responsible behavior on the part of banks. Irish Finance Minister Michael Noonan described the deal as "a major milestone in our effort to break the vicious link between the banks and the sovereigns." "Bail-in is now the rule," he said.
The member states will now have to negotiate the new rules with the European Parliament, a process that could take until the end of the year. The deal also provides member states with wide-reaching powers of intervention when financial institutions founder. For example, it would permit smaller banks to be closed in the future under standardized European regulations. The rules on bail-ins would only be applied to larger, systemically relevant banks that are in need of restructuring and are closely interlinked with other banks.
Out of fear of a devastating chain reaction, the EU member states bailed out faltering major banks in 2008 to the tune of hundreds of billions of euros. The first instance in which investors and creditors were forced to make a major contribution was this spring in the bailout of Cyprus. The new EU rules would mark a major shift in policy.
Resistance in Berlin
Germany, the Netherlands and other countries had pushed in negotiations for a far-reaching bail-in on the part of creditors and for the most unified rules possible. France had fought for greater leeway at the national level and the ability for the state to intervene at an earlier stage in a crisis situation. French Finance Minister Pierre Moscovici said it was crucial now that the permanent euro bailout fund, the European Stability Fund, had a role in financing bank bailouts defined in the new rules.
The Brussels meeting was the second after negotiators broke off talks on Saturday after more than 20 hours without a deal. Member-states had pledged to agree to the most important building blocks for a euro-zone banking union by the end of June. They had already agreed on a centralized European banking supervisory authority for the euro zone under the jurisdiction of the European Central bank. With the deal on bank resolution, a further pillar has been erected. But at least one important element -- deposit insurance -- remains to be negotiated.
At the EU summit on Thursday and Friday, European leaders are expected to push for further steps. Next week, the European Commission is to present a draft proposal for a single resolution system for the euro zone that would better integrate national resolution funds financed by the banks. The issue has already been a source of conflict between member states. Germany, for example, is opposed to the kind of centralized European fund that might see German savings banks forced to participate in the bailout of a major French bank.
dsl -- with wires
URL: © SPIEGEL ONLINE 2013
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH
European finance ministers on Thursday agreed to a deal that would require owners, creditors and depositors -- in that order -- to cover the expenses of bailing out or winding down failed banks. The reform marks another step towards a euro-zone banking union.
"We came to political agreement," German Finance Minister Wolfgang Schäuble said early Thursday morning. He said the reforms were an "important step," noting the shareholders and creditors would be "liable first and foremost."
Under the so-called "bail-in" deal, the result of what Schäuble described as "quite difficult and intense" talks, states would only intervene to rescue banks after all other actors, including depositors with more than €100,000 in their accounts, had participated to an extent representing at least 8 percent of total liabilities. The deal also would require member states to set up "ex-ante resolution funds," that would hold a sum equal to 1.3 percent of a nation's insured bank deposits. The banks themselves would be required to pay into these funds, but payouts in interventions would be cappped at 5 percent of a bank's total liabilities and would require approval from the EU in Brussels.
Germany Says Deposits Are Safe
With the new rules, the 27 EU member-states want to prevent taxpayers from getting stuck with the tab when financial institutions fail, as frequently happened during the recent global financial crisis. Schäuble said that depositors with less than €100,000 in their accounts would have nothing to worry about and that deposit guarantees would protect them not only in Germany, but also across the EU.
Meanwhile, Dutch Finance Minister Jeroen Dijsselbloem, who is also the head of the Euro Group, said the rules would lead to more responsible behavior on the part of banks. Irish Finance Minister Michael Noonan described the deal as "a major milestone in our effort to break the vicious link between the banks and the sovereigns." "Bail-in is now the rule," he said.
The member states will now have to negotiate the new rules with the European Parliament, a process that could take until the end of the year. The deal also provides member states with wide-reaching powers of intervention when financial institutions founder. For example, it would permit smaller banks to be closed in the future under standardized European regulations. The rules on bail-ins would only be applied to larger, systemically relevant banks that are in need of restructuring and are closely interlinked with other banks.
Out of fear of a devastating chain reaction, the EU member states bailed out faltering major banks in 2008 to the tune of hundreds of billions of euros. The first instance in which investors and creditors were forced to make a major contribution was this spring in the bailout of Cyprus. The new EU rules would mark a major shift in policy.
Resistance in Berlin
Germany, the Netherlands and other countries had pushed in negotiations for a far-reaching bail-in on the part of creditors and for the most unified rules possible. France had fought for greater leeway at the national level and the ability for the state to intervene at an earlier stage in a crisis situation. French Finance Minister Pierre Moscovici said it was crucial now that the permanent euro bailout fund, the European Stability Fund, had a role in financing bank bailouts defined in the new rules.
The Brussels meeting was the second after negotiators broke off talks on Saturday after more than 20 hours without a deal. Member-states had pledged to agree to the most important building blocks for a euro-zone banking union by the end of June. They had already agreed on a centralized European banking supervisory authority for the euro zone under the jurisdiction of the European Central bank. With the deal on bank resolution, a further pillar has been erected. But at least one important element -- deposit insurance -- remains to be negotiated.
At the EU summit on Thursday and Friday, European leaders are expected to push for further steps. Next week, the European Commission is to present a draft proposal for a single resolution system for the euro zone that would better integrate national resolution funds financed by the banks. The issue has already been a source of conflict between member states. Germany, for example, is opposed to the kind of centralized European fund that might see German savings banks forced to participate in the bailout of a major French bank.
dsl -- with wires
URL: © SPIEGEL ONLINE 2013
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH
=================================================================
04/01/2013 02:48 PM
Bomb from Brussels Cyprus Model May Guide Future Bank Bailouts
Should the Cypriot bailout become a model for the future? The mere suggestion sent markets tumbling last week. But increasing numbers of European politicians would like to see bank shareholders and investors bear a greater share of crisis risk. The EU may be changing its strategy. By SPIEGEL Staff
Jeroen Dijsselbloem's original game plan was to just keep a low profile. When the 47-year-old Dutch finance minister became head of the Euro Group three months ago, the first thing he did was deactivate his Twitter account. In meetings of the finance ministers of the 17 euro-zone states, he let his counterparts do most of the talking. And whenever he appeared before reporters in Brussels afterwards, he would start with sentences like: "Maybe it's good, if I say something."
Dijsselbloem seemed determined to become the most boring of all the boring bureaucrats in Brussels -- until last Monday, that is, when he did something no one would have anticipated: He detonated a bomb. The way that large depositors and creditors were being drawn into the bailout of Cypriot banks, he said, could become a model for the entire euro zone. In future aid packages, he said, one must look into whether bank shareholders, bond holders and large depositors could participate so as to spare taxpayers from having to foot the bill. He was announcing nothing less than a 180 degree about face.
Cyprus as a model? Dijsselbloem had hardly finished his comments before international news agencies began registering its impacts. Markets around the world nosedived, the euro sank to a four-month low and EU leaders had to rush into damage-control mode, as did the man who triggered the storm himself. Dijsselbloem backtracked by saying that Cypriot banks were obviously "a special case." Germany's top-selling daily tabloid, Bild, scoffed that Dijsselbloem would get a new nickname in Brussels: "Dusselbloem," the rough equivalent of "Dimwit-bloem."
But the ridicule might prove premature. In reality, Dijsselbloem merely expressed something that many Europeans already think. Whether at the European Parliament or in several Continental capitals, many are saying that the time is ripe for the financial sector to assume a greater share of the costs for rescuing ailing banks.
'Banks Must Save Themselves'
More is at stake than determining just how to deal with insolvent financial institutions. It is about core tenets of the bailout strategy being followed by the EU. Since the collapse of Lehman Brothers in 2008, it has primarily been EU taxpayers who have assumed liability for the fallout. Failing banks, such as Germany's Hypo Real Estate (HRE) or Spain's Bankia, were kept on artificial life support while shareholders and creditors were spared. The advantages were enjoyed not only by actors on the global financial markets, but also by major banking centers, such as those in Luxembourg and London, which could count on seeing governments prop up teetering financial institutions.
A growing number of politicians and experts are demanding an end to this arrangement. In the future, German Chancellor Angela Merkel said, "banks must save themselves." And German central bank board member Andreas Dombret is convinced that the financial sector can only regain health once there are no longer "implicit state guarantees for banks."
These guarantees were one of the fundamental reasons why Germany's state-owned Landesbanken invested in worthless securities, why Irish and Spanish banks financed excessively dubious real estate projects, and why Cypriot banks became a hub for investors with a penchant for tax evasion. The guarantees were also responsible for causing banks' balance sheets to swell to many times the value of their countries' annual economic performance. "It's not that there are just individual lending institutions that are too big to be allowed to fail," Dombret says. "There are clearly entire banking systems for which the same holds true." A country's financial sector, he adds, must be designed so that a national economy can cope with a downturn on its own.
But where is that the case? The balance sheets of Cypriot banks are seven times as large as the island's annual gross domestic product. The ratio is similar in Ireland, even though the banks in these countries have been being downsizing for four years. The imbalance is even more glaring in Europe's smallest countries, such as Malta and Luxembourg, where the bank balance-to-GDP ratio is 8-to-one and 22-to-one, respectively.
Since the outbreak of the crisis, the euro zone has succeeded in pruning back the banks, and their balance sheets are now only 3.5 times the size of the currency union's combined economic performance. But, in recent years, while hundreds of mainly smaller banks have been shut down in the United States, Europeans have closed their eyes to the dangers.
Stepping Into the Breach
Christine Lagarde, the former French finance minister and current head of the International Monetary Fund (IMF), spoke in Frankfurt on March 19 about the progress that has been made in banking regulations, saying that 20 banks had been "resolved" since 2007 and that 60 have undergone "deep restructuring." Though impressive at first glance, these figures are misleading. Most of the banks were nationalized (such as HRE and Northern Rock), subsumed by other institutions (Sachsen LB) or broken down into smaller units (WestLB). Few have actually disappeared.
More than anything, however, Lagarde's figures fail to indicate who bore the costs of rehabilitating the banks. "Since the outbreak of the financial crisis," Dombret says, "taxpayers have unfortunately been forced to step into the breach with all difficulties."
Indeed, since 2008, the European Commission has authorized €5 trillion ($6.4 trillion) in aid for the financial sector, equivalent to 40 percent of the EU's combined economic performance. Germany alone has allocated €646 billion to its banks. In the process, private creditors have only been asked to make a modest contribution. For example, the Irish government put four times as much capital into rescuing domestic banks as private creditors did, and the ratio is similar in Spain.
Likewise, shareholders of failing institutions have by no means lost their money in all cases. Owners of shares in Commerzbank, for example, were allowed to retain their stakes even though the bank, Germany's second-largest, received €18.2 billion in state aid.
In many cases, simply too little could be taken from the shareholders to stabilize the institutions. "The Cypriot case vividly shows how little capital resources Europe's banks possess to absorb possible losses," says Harald Hau, 46, a finance expert at the University of Geneva. In his view, the unequal distribution of burdens between bank shareholders and taxpayers is by design -- he speaks of "existing banking socialism."
The banks' lack of sufficient capital has made taxpayers de facto shareholders because they are unfailingly asked to pony up whenever a bank runs into trouble. But unlike the real shareholders, Hau notes, taxpayers are "in no way compensated for this risk."
Including the Creditors
In the case of Cyprus, European leaders have demonstrated for the first time that the burdens can be distributed differently. Laiki Bank, the country's second-largest financial institution, will be dismantled, and the remaining private shareholders of the already largely nationalized bank and its creditors will shoulder its losses. But the plan also calls for bank customers with large deposits to share in the pain for the first time: Deposits above €100,000 will be drawn on to help cover the bank's losses.
"The plan is good because creditors and major depositors will be included," says Daniel Gros, director of the Brussels-based Centre for European Policy Studies. He also believes that the Cyprus solution could become a blueprint for dealing with banks in other EU countries in crisis. In recent years, Gros continues, banks and their creditors have been bailed out because people have kept in mind the dramatic market turbulences that followed in the collapse of Lehman Brothers. But he thinks people will now say: "Look at Cyprus. The market reacted positively to the plan to close down a major bank and have its creditors bear the costs."
Forcing private creditors to participate in bailing out faltering banks has, to be sure, triggered worries about the possible flight of capital from ailing countries. Bank customers and creditors could "relocate (their money) from the weak to the strongest institutions," says Uwe Burkert, head of credit analysis at the Landesbank Baden-Württemberg, a publicly owned regional bank based in the southwestern German state.
However, the financial markets have so far reacted to the conditions set for bailing out Cypriot banks with surprising calm. Indeed, ever since July 2012, when European Central Bank President Mario Draghi pledged that the EU's central bank would "do whatever it takes to preserve the euro," the situation in economically troubled euro-zone countries has stabilized considerably.
If this calm persists, there is nothing to block the implementation of Dijsselbloem's plans. Indeed, even the European Commission backs them in principle. As early as last June, Internal Market Commissioner Michel Barnier presented the initial draft of an EU directive on bank liquidation. The draft envisions forcing private investors to bear more of the costs when banks run into trouble. However, Hau, the finance expert at the University of Geneva, criticizes the plan for not clearly specifying exactly which investors will be compelled to participate and in which order.
Dissent from Luxembourg
Precisely this issue is currently being discussed at the European Parliament. "We want to clearly strengthen the position of deposit customers," says Swedish European Parliament member Gunnar Hökmark. Under the proposal, deposits of up to €100,000 would be excluded from any loss participation at a bank. Likewise, any deposits over that amount would only get hit if the losses couldn't be fully covered by a bank's shareholders and other creditors.
But governments and parliamentarians are fighting fiercely over the fine print. Officials representing Finland, the Netherlands and Germany want to pull in the financial sector as quickly and comprehensively as possible. But highly indebted Southern European countries, as well as governments fearing for their domestic financial sectors, are stepping on the brakes.
Luxembourg Finance Minister Luc Frieden, for example, has warned about the dangers of following the Cyprus model of making people with deposits greater than €100,000 help pay for bailouts. "This will lead to a situation in which investors invest their money outside the euro zone," he said. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers."
Despite major opposition, backers of Dijsselbloem's strategy believe their chances are improving. This has prompted Carsten Schneider, the budget policy expert for the opposition center-left Social Democrats in Berlin, to call for implementing the rules for winding down banks by 2014 rather than the currently planned 2018. "Societal and political acceptance is ending for the model of bank rescues in which the state protects bondholders and major investors," he says.
Dombret, the Bundesbank board member, likewise believes it would be sensible to push up the introduction of the new rules to 2015. Norbert Berthle, the parliamentary budget expert for Chancellor Merkel's conservatives, acknowledges that, "we first have to pull shareholders and creditors into a bank's rescue."
Dijsselbloem Holds Firm
In the end, however, one must conclude that, while Dijsselbloem's proposal may have been correct, it won't make it easier for EU leaders to resolve the euro debt crisis. On the one hand, the debate is urgently needed to put an end to the banking sector's business principle holding that profits should be privately enjoyed while losses are borne publicly. On the other, the issue threatens to spark new conflicts within the euro zone. Indeed, the dispute over Europe's banking system could soon become just as bitter as that between Northern and Southern Europe.
Either way, Dijsselbloem is determined to wage the battle. Though he has said that he no longer thinks the Cyprus bailout is a good model, he still intends to hold firm to the crux of his approach.
"Now that the situation is more calm and the financial markets seem to have become more steady and easier, we should start pushing back the risks," Dijsselbloem said in an interview with the Financial Times and Reuters last week. "Taking the risk from the financial sector and taking it on to public shoulders is not the right approach."
BY MARTIN HESSE, MICHAEL SAUGA, CORNELIA SCHMERGAL and CHRISTOPH SCHULT
Translated from the German by Josh Ward
URL: Related SPIEGEL ONLINE links:
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH
Dijsselbloem seemed determined to become the most boring of all the boring bureaucrats in Brussels -- until last Monday, that is, when he did something no one would have anticipated: He detonated a bomb. The way that large depositors and creditors were being drawn into the bailout of Cypriot banks, he said, could become a model for the entire euro zone. In future aid packages, he said, one must look into whether bank shareholders, bond holders and large depositors could participate so as to spare taxpayers from having to foot the bill. He was announcing nothing less than a 180 degree about face.
Cyprus as a model? Dijsselbloem had hardly finished his comments before international news agencies began registering its impacts. Markets around the world nosedived, the euro sank to a four-month low and EU leaders had to rush into damage-control mode, as did the man who triggered the storm himself. Dijsselbloem backtracked by saying that Cypriot banks were obviously "a special case." Germany's top-selling daily tabloid, Bild, scoffed that Dijsselbloem would get a new nickname in Brussels: "Dusselbloem," the rough equivalent of "Dimwit-bloem."
But the ridicule might prove premature. In reality, Dijsselbloem merely expressed something that many Europeans already think. Whether at the European Parliament or in several Continental capitals, many are saying that the time is ripe for the financial sector to assume a greater share of the costs for rescuing ailing banks.
'Banks Must Save Themselves'
More is at stake than determining just how to deal with insolvent financial institutions. It is about core tenets of the bailout strategy being followed by the EU. Since the collapse of Lehman Brothers in 2008, it has primarily been EU taxpayers who have assumed liability for the fallout. Failing banks, such as Germany's Hypo Real Estate (HRE) or Spain's Bankia, were kept on artificial life support while shareholders and creditors were spared. The advantages were enjoyed not only by actors on the global financial markets, but also by major banking centers, such as those in Luxembourg and London, which could count on seeing governments prop up teetering financial institutions.
A growing number of politicians and experts are demanding an end to this arrangement. In the future, German Chancellor Angela Merkel said, "banks must save themselves." And German central bank board member Andreas Dombret is convinced that the financial sector can only regain health once there are no longer "implicit state guarantees for banks."
These guarantees were one of the fundamental reasons why Germany's state-owned Landesbanken invested in worthless securities, why Irish and Spanish banks financed excessively dubious real estate projects, and why Cypriot banks became a hub for investors with a penchant for tax evasion. The guarantees were also responsible for causing banks' balance sheets to swell to many times the value of their countries' annual economic performance. "It's not that there are just individual lending institutions that are too big to be allowed to fail," Dombret says. "There are clearly entire banking systems for which the same holds true." A country's financial sector, he adds, must be designed so that a national economy can cope with a downturn on its own.
But where is that the case? The balance sheets of Cypriot banks are seven times as large as the island's annual gross domestic product. The ratio is similar in Ireland, even though the banks in these countries have been being downsizing for four years. The imbalance is even more glaring in Europe's smallest countries, such as Malta and Luxembourg, where the bank balance-to-GDP ratio is 8-to-one and 22-to-one, respectively.
Since the outbreak of the crisis, the euro zone has succeeded in pruning back the banks, and their balance sheets are now only 3.5 times the size of the currency union's combined economic performance. But, in recent years, while hundreds of mainly smaller banks have been shut down in the United States, Europeans have closed their eyes to the dangers.
Stepping Into the Breach
Christine Lagarde, the former French finance minister and current head of the International Monetary Fund (IMF), spoke in Frankfurt on March 19 about the progress that has been made in banking regulations, saying that 20 banks had been "resolved" since 2007 and that 60 have undergone "deep restructuring." Though impressive at first glance, these figures are misleading. Most of the banks were nationalized (such as HRE and Northern Rock), subsumed by other institutions (Sachsen LB) or broken down into smaller units (WestLB). Few have actually disappeared.
More than anything, however, Lagarde's figures fail to indicate who bore the costs of rehabilitating the banks. "Since the outbreak of the financial crisis," Dombret says, "taxpayers have unfortunately been forced to step into the breach with all difficulties."
Indeed, since 2008, the European Commission has authorized €5 trillion ($6.4 trillion) in aid for the financial sector, equivalent to 40 percent of the EU's combined economic performance. Germany alone has allocated €646 billion to its banks. In the process, private creditors have only been asked to make a modest contribution. For example, the Irish government put four times as much capital into rescuing domestic banks as private creditors did, and the ratio is similar in Spain.
Likewise, shareholders of failing institutions have by no means lost their money in all cases. Owners of shares in Commerzbank, for example, were allowed to retain their stakes even though the bank, Germany's second-largest, received €18.2 billion in state aid.
In many cases, simply too little could be taken from the shareholders to stabilize the institutions. "The Cypriot case vividly shows how little capital resources Europe's banks possess to absorb possible losses," says Harald Hau, 46, a finance expert at the University of Geneva. In his view, the unequal distribution of burdens between bank shareholders and taxpayers is by design -- he speaks of "existing banking socialism."
The banks' lack of sufficient capital has made taxpayers de facto shareholders because they are unfailingly asked to pony up whenever a bank runs into trouble. But unlike the real shareholders, Hau notes, taxpayers are "in no way compensated for this risk."
Including the Creditors
In the case of Cyprus, European leaders have demonstrated for the first time that the burdens can be distributed differently. Laiki Bank, the country's second-largest financial institution, will be dismantled, and the remaining private shareholders of the already largely nationalized bank and its creditors will shoulder its losses. But the plan also calls for bank customers with large deposits to share in the pain for the first time: Deposits above €100,000 will be drawn on to help cover the bank's losses.
"The plan is good because creditors and major depositors will be included," says Daniel Gros, director of the Brussels-based Centre for European Policy Studies. He also believes that the Cyprus solution could become a blueprint for dealing with banks in other EU countries in crisis. In recent years, Gros continues, banks and their creditors have been bailed out because people have kept in mind the dramatic market turbulences that followed in the collapse of Lehman Brothers. But he thinks people will now say: "Look at Cyprus. The market reacted positively to the plan to close down a major bank and have its creditors bear the costs."
Forcing private creditors to participate in bailing out faltering banks has, to be sure, triggered worries about the possible flight of capital from ailing countries. Bank customers and creditors could "relocate (their money) from the weak to the strongest institutions," says Uwe Burkert, head of credit analysis at the Landesbank Baden-Württemberg, a publicly owned regional bank based in the southwestern German state.
However, the financial markets have so far reacted to the conditions set for bailing out Cypriot banks with surprising calm. Indeed, ever since July 2012, when European Central Bank President Mario Draghi pledged that the EU's central bank would "do whatever it takes to preserve the euro," the situation in economically troubled euro-zone countries has stabilized considerably.
If this calm persists, there is nothing to block the implementation of Dijsselbloem's plans. Indeed, even the European Commission backs them in principle. As early as last June, Internal Market Commissioner Michel Barnier presented the initial draft of an EU directive on bank liquidation. The draft envisions forcing private investors to bear more of the costs when banks run into trouble. However, Hau, the finance expert at the University of Geneva, criticizes the plan for not clearly specifying exactly which investors will be compelled to participate and in which order.
Dissent from Luxembourg
Precisely this issue is currently being discussed at the European Parliament. "We want to clearly strengthen the position of deposit customers," says Swedish European Parliament member Gunnar Hökmark. Under the proposal, deposits of up to €100,000 would be excluded from any loss participation at a bank. Likewise, any deposits over that amount would only get hit if the losses couldn't be fully covered by a bank's shareholders and other creditors.
But governments and parliamentarians are fighting fiercely over the fine print. Officials representing Finland, the Netherlands and Germany want to pull in the financial sector as quickly and comprehensively as possible. But highly indebted Southern European countries, as well as governments fearing for their domestic financial sectors, are stepping on the brakes.
Luxembourg Finance Minister Luc Frieden, for example, has warned about the dangers of following the Cyprus model of making people with deposits greater than €100,000 help pay for bailouts. "This will lead to a situation in which investors invest their money outside the euro zone," he said. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers."
Despite major opposition, backers of Dijsselbloem's strategy believe their chances are improving. This has prompted Carsten Schneider, the budget policy expert for the opposition center-left Social Democrats in Berlin, to call for implementing the rules for winding down banks by 2014 rather than the currently planned 2018. "Societal and political acceptance is ending for the model of bank rescues in which the state protects bondholders and major investors," he says.
Dombret, the Bundesbank board member, likewise believes it would be sensible to push up the introduction of the new rules to 2015. Norbert Berthle, the parliamentary budget expert for Chancellor Merkel's conservatives, acknowledges that, "we first have to pull shareholders and creditors into a bank's rescue."
Dijsselbloem Holds Firm
In the end, however, one must conclude that, while Dijsselbloem's proposal may have been correct, it won't make it easier for EU leaders to resolve the euro debt crisis. On the one hand, the debate is urgently needed to put an end to the banking sector's business principle holding that profits should be privately enjoyed while losses are borne publicly. On the other, the issue threatens to spark new conflicts within the euro zone. Indeed, the dispute over Europe's banking system could soon become just as bitter as that between Northern and Southern Europe.
Either way, Dijsselbloem is determined to wage the battle. Though he has said that he no longer thinks the Cyprus bailout is a good model, he still intends to hold firm to the crux of his approach.
"Now that the situation is more calm and the financial markets seem to have become more steady and easier, we should start pushing back the risks," Dijsselbloem said in an interview with the Financial Times and Reuters last week. "Taking the risk from the financial sector and taking it on to public shoulders is not the right approach."
BY MARTIN HESSE, MICHAEL SAUGA, CORNELIA SCHMERGAL and CHRISTOPH SCHULT
Translated from the German by Josh Ward
URL: Related SPIEGEL ONLINE links:
- Bail-In Blues Luxembourg Warns of Investor Flight from Europe (03/29/2013)
http://www.spiegel.de/international/europe/0,1518,891672,00.html
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH