|In Unprecedented Move, ECB Advises Tapping Senior Bondholders Of Weaker Banks But Europe's Finance Ministers Nix That Plan...For Now|
|Monday, July 16, 2012 13:29|
The European Central Bank (ECB) recommended a stark shift in policy in dealing with Spain’s debt problem: it placed senior bondholders squarely at the center of those who should suffer losses. Until now, senior bondholders have been kept whole while shareholders and junior bondholders have borne significant cuts to their holdings.
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Europe’s finance ministers have rejected the recommendation for now out of fears of market response. But the move indicates a possible shift that may eventually bring losses to even the most senior debt holders.
The Eurozone is in the process of figuring out new and more effective approaches to its sovereign debt problems. ECB chief Mario Draghi stated at the July 9 meeting of Europe’s finance ministers that senior bond holders should share in the losses along with taxpayers and junior bond holders. Previous discussions had only involved senior bond holders in the case of bank liquidations.
The ECB’s role is to provide advice in ensuring that Eurozone members remain in line with the European Union guidelines. It also governs interest rate policies. The recommendation to include senior debt holders in bearing the losses is a result of the effort to allow banks to be recapitalized. It would even out the burden on taxpayers and make greater use of private funds instead of throwing the burden completely on the public.
Greece is a perfect example of what happens when public funds are at risk. The taxpayer burden is so heavy from its banking situation that public services have had to be cut and people have difficulty finding work. Obviously, this filters through the economy.
This is one reason that ECB officials are trying to limit the amount of public funds that are put at risk. As well, if senior bond holders in Spain were required to take losses, it would raise questions in Ireland about why their taxpayers were forced to bear the entire burden.
This is just one example of the lack of organization around policy issues within the Eurozone. The uncertainty is causing turmoil in the markets and is a large component in the slowdown in global economies. Europe desperately needs to come up with an organized plan for managing issues within the union. Only then will global markets and economies have the confidence needed to press forward and resume a growth track.