16 September 2015

Financial Times: Eurozone races to restructure Greek banks as bail-in looms

Eurozone officials are racing to restructure Greece’s banking system before new rules kick in that could wipe out corporate deposits with potentially disastrous effects for the Greek economy.

When eurozone negotiators agreed Greece’s bailout in August, they bowed to the insistence of Mario Draghi, European Central Bank president, that bank deposits should not be touched. At the time, Greece’s creditors were considering raiding accounts at the country’s four largest banks to help find the €25bn potentially needed to shore up and fully reopen a financial sector nearly destroyed by a run on deposits and economic turmoil.

But now EU authorities find themselves in a bind: if they are to keep their promise not to touch deposits, they must complete the bank restructuring in little more than three months — before separate EU rules on bank bailouts come into effect on January 1.

Under those rules, any eurozone bank that accepts government financial assistance must first “bail in” creditors totalling 8 per cent of the bank’s liabilities. In effect, that means first wiping out shareholders, then lower-priority bondholders and, if that is not enough, senior bondholders and deposits over €100,000.

The idea, strongly supported by Berlin, was to reduce the cost to taxpayers of bank bailouts. Specifically, they wanted to prevent a repeat of Irish and Spanish-style rescues, in which governments took on tens of billions of euros in debts to prop up their banks.

EU officials say they are desperate to get a Greek recapitalisation deal done before the 8 per cent rule kicks in.

Some officials acknowledge the rush to avoid using the EU’s much-touted new “banking union” rules in Greece raises questions about whether they are fit for purpose, particularly in cases where a country’s entire banking system is in need of a rescue.

Full article on Financial Times (subscription required)

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