Tuesday

5th Mar 2024

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

Get the EU news that really matters

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.

EU supply chain law fails, with 14 states failing to back it

Member states failed on Wednesday to agree to the EU's long-awaited Corporate Sustainable Due Diligence Directive, after 13 EU ambassadors declared abstention and one, Sweden, expressed opposition (there was no formal vote), EUobserver has learned.

Angry farmers block Brussels again, urge fix to 'unfair' prices

Following weeks of demonstrations across Europe, farmers returned to Brussels to protest over unfair competition in prices, as EU agriculture ministers met just a few metres away to discuss a response. The police used water cannon and tear gas.

EU's €723bn Covid recovery fund saw growth, but doubts remain

The €723bn Covid-19 recovery fund, launched three years ago, has been a success, according to a mid-term internal review — but less effective than initially predicted. And according to one NGO, the commission painted an "overly positive picture".

Opinion

The six-hour U-turn that saw the EU vote for austerity

The EU's own analysis has made it clear this is economic self-sabotage, and it's politically foolish three months from European elections where the far-right are predicted to increase support, writes the general secretary of the European Trade Union Confederation.

Opinion

Why are the banking lobby afraid of a digital euro?

Europeans deserve a digital euro that transcends the narrow interests of the banking lobby and embodies the promise of a fairer and more competitive monetary and financial landscape.

Latest News

  1. EU must overhaul Africa trade offer to parry China, warns MEP
  2. EU watchdog faults European Commission over Libya
  3. Hungary's Ukrainian refugees in two minds as relations sour
  4. The six-hour U-turn that saw the EU vote for austerity
  5. Defence, von der Leyen, women's rights, in focus This WEEK
  6. The farming lobby vs Europe's wolves
  7. EU socialists fight battle on two fronts in election campaign
  8. EU docks €32m in funding to UN Gaza agency pending audit

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic Food Systems Takeover at COP28
  2. Nordic Council of MinistersHow women and men are affected differently by climate policy
  3. Nordic Council of MinistersArtist Jessie Kleemann at Nordic pavilion during UN climate summit COP28
  4. Nordic Council of MinistersCOP28: Gathering Nordic and global experts to put food and health on the agenda
  5. Friedrich Naumann FoundationPoems of Liberty – Call for Submission “Human Rights in Inhume War”: 250€ honorary fee for selected poems
  6. World BankWorld Bank report: How to create a future where the rewards of technology benefit all levels of society?

Stakeholders' Highlights

  1. Georgia Ministry of Foreign AffairsThis autumn Europalia arts festival is all about GEORGIA!
  2. UNOPSFostering health system resilience in fragile and conflict-affected countries
  3. European Citizen's InitiativeThe European Commission launches the ‘ImagineEU’ competition for secondary school students in the EU.
  4. Nordic Council of MinistersThe Nordic Region is stepping up its efforts to reduce food waste
  5. UNOPSUNOPS begins works under EU-funded project to repair schools in Ukraine
  6. Georgia Ministry of Foreign AffairsGeorgia effectively prevents sanctions evasion against Russia – confirm EU, UK, USA

Join EUobserver

EU news that matters

Join us