by The Daily Bail,
Dutch Finance Minister Jeroen Dijsselbloem, who heads the euro-zone finance ministers, reportedly said Monday that Cyprus’s bailout deal could serve as a template for resolving future bank restructurings in Europe.
Up until now, senior bank bondholders in the euro zone had been exempted from taking losses on their investment, leaving taxpayers to take the brunt of the responsibility for supporting failed banks. The concern had been that touching senior bonds, a cornerstone of European bank funding, could rattle confidence across the region’s financial system.
The forced losses on senior bondholders could return to haunt policy makers if stresses worsen in other fiscally-shaky euro states in the future, with investors in smaller lenders at the highest risk.
“The very public debate that has taken place has made it clear to everyone that bank creditors, all the way down to depositors, should expect to pay in future bailouts.”
Most of Cyprus’s contribution will come from deposits over €100,000 and junior bank bondholders. The total amount of senior Cypriot bank bondholders is small. According to European Central Bank data, Cypriot banks have issued €1.7 billion of debt securities, of which analysts estimate just €200 million is senior debt.
In Ireland’s bailout, the troika—the IMF, the European Commission and the ECB—obliged the government to pay back senior bank bondholders. In all, Ireland pumped in €64 billion, equivalent to 40% of its economic output, to keep a broken banking system from collapse over the past five years. A significant part of those sums helped pay back international bank bondholders across six Irish banks.
While not in the euro zone, losses had been previously imposed on senior bank debtholders in Iceland and Denmark. The latter involved losses on two small Danish banks, Fjordbank Mors and Amagerbanken, in 2011. In 2008 Iceland nationalized its banks, completely wiping out the debt.