We issued a warning here in December 2013 in regard to the Bank Recovery and Resolution Directive (BRRD). This European directive effectively puts into law what happened in Cyprus in April, 2013, where, as we recall, the failing banking system bailed itself out not only by seeking relief from shareholders and bond holders – which is the norm – but also by confiscating depositors’ accounts above 100,000 euros. This is theft, pure and simple, a challenge to the right of ownership. And if the 100,000 euro floor is enough to reassure most savers, it might turn out to be an illusion given the size of the losses: Cyprus, then, had received 10billion euros in aid from the European Union and the IMF (or 2/3 of its GDP); but who could afford to bail out a large country such as Spain, Italy or France with an equivalent percentage of its GDP, should a similar crisis occur?
The events in Cyprus turned out to be sort of a general rehearsal and, from now on, all European countries are allowed to use this method. The implementation of this directive must be ratified by individual countries by January 1st, 2016, at the latest, but Austria has already implemented it since, to the point, one of its banks is in serious trouble. Hypo Alpe Adria was nationalised in 2009 following risky investments, notably in the Balkans (its turnover went from 1.87billion euros in 1992 to 43.3billion euros in 2008!). After several bailouts for a total of 5.5billion euros, the Austrian government announced last Sunday that it would not pay another euro and that the bank was placed under “resolution”. The bank immediately announced it could be short up to 7.6billion euros in net equity...
Those who will assume the loss won’t be the shareholders (the bank is totally state-owned); it will be those who bought bonds issued by the bank, and they will lose between 50% and 70%. It was a smart move because, without this directive, the state would have had to pay! For now depositors may rest assured but they must heed the warning: the BRRD directive was implemented in Europe for the first time, without notice, without any coordination, in the space of a weekend. For a nation the temptation is very strong: it can stop disbursing and transfer the debt burden to the shareholders, the bond holders and, eventually, the depositors. I guess it’s a safe bet that this directive will be used again in Europe.
The Austrian government’s March 1st decision is properly historic but, strangely enough, mainstream media remains silent... From now on no European saver should ignore the fact that his bank could be put under “resolution” and that his accounts could be used to bail it out, as he could hear it on the Sunday evening news. No, the crisis is not over and, from now on, banks will be bailed out by shareholders, bond holders and savers, and it will all be legal. Be warned.
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Philippe Herlin Finance Researcher / Member of the Goldbroker.com Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.