ECB change of policy.
THE EUROPEAN Central Bank’s “extraordinary” shift of policy on burning senior bondholders will form part of the discussions between Minister for Finance Michael Noonan and bank president Mario Draghi in Frankfurt today.
Mr Draghi had told a meeting of EU finance ministers last week that the ECB would not insist that no losses be forced on senior bondholders of Spain’s worst-affected banks, the Wall Street Journal reported yesterday.
This represented a substantial policy change for the ECB which had consistently refused the request of successive governments in Ireland to compel senior creditors to bear some of the losses.
One wonders why this change of policy.
Could it be because depositors are guaranteed up to 100.000 EUR by the state?
If you put your toxic waste into a newly formed subsidiary and finance that with a mixture of deposits and senior bond – that you buy yourself. Then in the event of a trip to the dustbin, then the depositors are junior; but they are guaranteed by the state – so the state will have to pay up – and you will save the bonds you have bought from yourself.
Two distressed banks swap senior bonds and in the event of a bankruptcy leave it to the junior creditors to take the rap. Much nicer than cross holding, where in the same event – you lose your money because the shares you hold in the bankrupt bank are now worthless.
Anybody with a better explanation?