Juggling Dynamite

This is a game changer at long, long last: a return to a virtuous circle of capitalism where stock and bond investors (which includes firm executives) bear the risk and loss from financial failure NOT TAXPAYERS.

Jeroen Dijsselbloem, the president of the eurogroup of European Finance Ministers explained this morning in an interview with the Financial Times, that the Cyprus bail-in of bondholders and large depositors agreed to on the weekend, marks the beginning of a new course for Europe: a radical change from other bank rescues performed over the last three years. By shifting financial responsibility away from taxpayers and on to the investors and deposit holders in failing banks, a new era of financial accountability has come back in vogue:

“Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach,” Mr Dijsselbloem, who is also the Dutch finance minister, said in an interview with the Financial Times and Reuters hours after he finalised the Cypriot programme.

“If we want to have a healthy, sound financial sector, the only way is to say: ‘Look, there where you take the risks, you must deal with them, and if you can’t deal with them you shouldn’t have taken them on and the consequence might be that it is end of story’,” he added. “That’s an approach that I think we, now that we are out of the heat of the crisis, should consequently take.” See: Cyprus to be model for future bailouts

Here is a direct video link.

“If the ECB’s toolkit can’t save a country that accounts for 0.2 percent of the euro area’s gross domestic product, then how will it provide meaningful support when financial or fiscal difficulties emerge in larger countries such as Spain and Italy? This question should be keeping investors up at night, because it’s a given that such difficulties will arise — the only question is when.”

See: Cyprus shows trust in ECB is misplaced

“Cyprus and the EU reached a new late-night bailout deal last night that will reduce the chance that Cyprus’s financial system and economy will completely implode.

The 10 billion euro deal requires Cyprus to drastically shrink its banking sector, which has grown to 8Xs the size of the country’s economy, by unwinding Cyprus’ second largest bank, Laiki. In doing so, bondholders and depositors with more than 100,000 euros will take a hair cut.”

Moreover capital controls have been instated to restrict the amount that depositors are able to withdraw from their bank accounts each day. All of this is likely to drive nervous depositors out of other Eurozone banks in the near term. See this direct video link for a discussion of the likely ramifications of the Cyprus bail-in.