Monday, March 25, 2013

The Reality of the Cyprus 'Solution' Begins to Set In on Other European Countries

The celebration of the Cyprus bailout was both short lived and premature, to say the least.

When banks have insufficient resources to clean up bad loans, which they always do in a crisis, people get hurt. It's just a matter of which people.

And since Cyprus is but one small example of one very big European problem with financial solvency and the bad loans of its financial institutions, there's more to come. So watch out, Spain, Italy and others. The Cyprus 'solution' may be headed your way sometime soon.

Eurogroup head: Cyprus deal template for banks has the breaking news:

"FRANKFURT -- The rescue program for Cyprus reached on Monday is a new template for addressing banking problems in the euro zone, said Dutch Finance Minister Jeroen Dijsselbloem, the chair of the Eurogroup of euro-zone finance ministers, according to Reuters. "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?' If the bank can't do it, then we'll talk to shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," he said, according to the report."

Summing Up

Reality is reality.

Taxpayers will no longer be the first ones called on to come up with bailout money for banks if the Cyprus template is followed.

The bank's shareholders and bondholders will be 'bailed-in' instead.

Thus, only after the bank's shareholders and the bondholders have been tapped for funds when the bad loans come due, will the bank's uninsured deposit holders be asked to foot the bill.

In the future, taxpayers will get a well deserved break, for once.

As a result, European companies and investors will become much more selective concerning which banks they choose to do business with in the future. In the end, that will prove to be a very good thing.

And it would be a good habit for us to adopt right here in the U.S. as well.

And while during the transition period, it would undoubtedly be painful for many banks, as well as their owners and bondholders, it would be great for the financial system as a whole.

These 'bail-ins' make much more sense for taxpayers than bailouts.

That's my take.

Thanks. Bob.

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