July 23, 2012
The ECB has shifted its stance on bailing in senior creditors. Whereas, under Trichet, it vehemently argued against such action, Draghi has now indicated it would be appropriate to share bank-failure burdens more widely. The shift in the ECB’s stance is sound in principle and logical against the background of forthcoming legislation on an EU-wide bank resolution regime (an integral part of the planned Banking Union), but the timing is surprising. Not only is agreement on the resolution regime (scheduled for 2018) and Banking Union far off, the threat of bailing in senior creditors will also further undermine confidence in the EU banking sector. Two consequences are likely: (i) EU programme countries that received financial assistance, above all Ireland, will press for a revision of the terms, understandably claiming it was on the insistence of the ECB and creditor countries that they spared senior creditors and instead transformed private debt into public debt. (ii) EU banks’ funding costs will rise further and their ability to raise funding in the market will continue to be impaired. Already, Q2 issuance (EUR 97 bn) was only 2/3 of that in Q2 2011, and the share of covered bonds – which would not be bailed in – has jumped to almost 60%, against an average of about 1/3 in the pre-crisis years (2005-08). And: when Trichet refused senior creditor bail-ins in late 2010, CDS spreads on EU banks’ senior debt stood at 150 bp – but now at 250 bp.
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