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Europe will need to accelerate implementation of its bail-in and bank resolution scheme

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Basically, European national governments, as currency users, have limited capacity to bail out financial institutions. So creditors need to pony up. Having them do so creates funding problems, not just for the insolvent banks but banks more generally. That issue is one I discussed after Ireland hit the wall in 2010 and was bailed out in 2011. I wrote up how the Irish can prevent a bank crisis from becoming sovereign default in allowing sub debt holders to take haircuts in November of 2010 but the issue is more complex than that. The Swedes gave a blanket guarantee to bondholders for fear of the new funding issue.

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My suggestion is that preferreds be converted first, wiped out if the capital is insufficient before moving to the debt holders. The debt holders should have an option of writedowns or equity conversion especially because some debt holders from funds are specifically limited in the types of investments they can hold. And senior debt is the stickiest wicket because haircuts here could create contagion. Nevertheless, the outline here is clear: set specific guidelines on how much bailing in one can anticipate will need to occur and this will go a long way toward relieving market funding worries for euro banks.

To the degree that Europe devises a bank resolution scheme along these lines, they will need to use it because bank recapitalisation will be an issue outside of Spain as well.


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.