Thursday

21st Jan 2021

Brussels wants bondholders to help pay for bank failures

  • Citizens have not been pleased with being saddled with the burden of bailing out failed banks (Photo: William Murphy)

The public would be spared from further pain in bailing out banks in the future, with bondholders instead footing more of the bill under plans unveiled on Thursday (6 January) by the European Commission to give EU national regulators more powers to intervene ahead of any crisis.

The EU executive outlined a series of ideas up for discussion that suggest bondholders should be forced to accept a 'haircut' on their investments in a troubled bank or convert their bonds into equity.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Reacting to high-profile banking failures during the economic crisis from Belgium's Fortis, to the crash of US investment house Lehman Brothers, to Icelandic banks and Ireland's debt-engorged Anglo Irish Bank, EU member states have chosen to bail out their banking sector, with private debt being shifted wholesale over to the public sector.

Governments support for banks has amounted to 13 percent of GDP, according to commission figures.

Capitals have since used the opportunity to impose sweeping austerity measures as a way to pay for the tab, moves that have proved massively unpopular amongst citizens who complain that they are paying the price of a crisis they did not create.

"The impact on taxpayers is obvious," the EU executive said in a statement, adding that the existing arrangements covering how to deal with such crises retained "serious shortcomings."

"We must put in place a system which ensures that Europe is well prepared to deal with bank failures in an orderly manner - without taxpayers being called on again to pay the costs," said internal market commissioner Michel Barnier.

Under the proposals, which would see a so-called bail-in from investors, national authorities would be given the power to write down or convert debt into equity in the failing bank.

However, out of fear of setting off fresh panic in the markets, the commission stresses that such measures would only affect future debt, with existing bondholders spared any such pain.

"It is not envisaged that such a power would apply to existing debt that is currently in issue, as that could be disruptive," it explained.

Under the outlined proposals, national regulators would be given powers to react to brewing banking failures earlier on, including the ability to impose a replacement of management, force a bank to stop engaging in excessively risky activities, or require the bank to implement a recovery plan.

Regulators could also be able to appoint a 'special manager', a 'Mr Fix-It' parachuted in for a short period to run the firm.

The commission also hopes to see the development of a framework for EU cross-border co-ordination in the event of future banking failures. During the crisis, cross-border responses to banking disasters have been ad-hoc, the EU executive worries.

In the future, national authorities would co-ordinate their responses to ensure financial stability in all affected member states in order to achieve an outcome that best benefits the EU "as a whole".

The proposals are currently at the consultation stage, with fleshed out legislative initiatives not expected before the summer. They also focus only on banks. Similar measures focusing on insurance firms and other types of financial institutions are to be unveiled before the end of the year.

However, markets were quick to react to Brussels' call on them to pay up, with interest rates on Portuguese and Spanish government bonds jumping.

After Lisbon announced it was to attempt a sale of between €750 million and €1.24 billion in bonds next Wednesday, yield spreads between Portuguese debt and German bonds climbed to 4.14 percentage points.

Belgian rates also climbed to 4.05 percent for ten-year bonds, although analysts regard this as more of a reaction to the latest episode in the ongoing failure of the countries' Flemish and francophone parties failure to form a government.

Johan Vande Lanotte, a mediator appointed by the king resigned, declaring: "You can take a horse to water but you can't make him drink."

A government coalition has yet to form since the general election, which tool place on 13 June last year.

Vietnam jails journalist critical of EU trade deal

A journalist who had demanded the EU postpone its trade deal with Vietnam until human rights improved has been sentenced to 15 years in jail. The EU Commission says it first needs to conduct a detailed analysis before responding.

Warsaw and Budapest seek EU funds despite national veto

A senior EU diplomat said Poland and Hungary should lift their veto or give a signal they are willing to do by Tuesday - otherwise there will be alternative plans for a recovery fund with the other 25 member states.

Germany asks capitals to give a little in EU budget impasse

European Parliament negotiators are demanding €39bn in new funding for EU programmes such as Horizon research and Erasmus, in talks with the German EU presidency on the budget. Meanwhile, rule-of-law enforcement negotiations have only just begun.

EU budget talks suspended in fight for new funds

MEPs are requesting additional, new funding of €39bn for 15 EU programs. The German presidency argues that budget ceilings, agreed by EU leaders at a marathon summit in July, will be impossible to change without a new leaders' meeting.

News in Brief

  1. Brexit prompted finance exodus from UK to France
  2. Italian PM Conte wins confidence vote in Senate
  3. Borrell washes hands of EU's Venezuela policy
  4. Russia backs Greece in eastern Mediterranean dispute
  5. 'Ski-holiday' Switzerland reaches new infection high
  6. Germany extends lockdown, others expected to follow
  7. Barnier to be Brexit special adviser to von der Leyen
  8. EU commisioner to visit Bosnia's Lipa migrant camp

Budget deal struck, with Hungary threat still hanging

Ultimately, the European Parliament managed to squeeze an extra €16bn in total - which will be financed with competition fines the EU Commission hands out over the next seven years, plus reallocations within the budget.

Stakeholders' Highlights

  1. UNESDAEU Code of Conduct can showcase PPPs delivering healthier more sustainable society
  2. CESIKlaus Heeger and Romain Wolff re-elected Secretary General and President of independent trade unions in Europe (CESI)
  3. Nordic Council of MinistersWomen benefit in the digitalised labour market
  4. Nordic Council of MinistersReport: The prevalence of men who use internet forums characterised by misogyny
  5. Nordic Council of MinistersJoin the Nordic climate debate on 17 November!
  6. UNESDAMaking healthier diets the easy choice

Latest News

  1. MEPs call to halt Russia pipeline over Navalny arrest
  2. EU targets vaccinating 70% of adults by summer
  3. Portugal pushes to start delayed 'future EU' conference
  4. EU Parliament pressing for inquiry into Frontex
  5. Untapped potential of the single market could boost European recovery
  6. Biden's 'Age of Aquarius'? Mars and Venus will clash over China
  7. The new dimension of 'ever-closer union'
  8. What do new CDU chief's pro-Russia views mean for Europe?

Join EUobserver

Support quality EU news

Join us