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(37,305 posts)
Sun Mar 31, 2013, 09:14 AM Mar 2013

Almost all EU countries have banking systems that are outsized by global standards,

Cyprus’ significance was always going to stem more from the precedent it created than from its size. In choosing a relatively conventional good bank, bad bank model, the authorities have done much to alleviate the damage that would have been caused by an arbitrary tax on uninsured depositors. But the very “success” of the solution now being adopted seems likely to lead to its replication elsewhere. While good news for the sovereigns and for longer-term growth prospects, its negative repercussions for senior bank bondholders still seem far from being priced in.

So much for existing statutes

The Cyprus model has three key features, which highlight the effective elimination of many of bondholders’ supposed protections:

Hasty implementation under national legislation: the rapid passage of new national laws effectively re-writes existing bankruptcy legislation, reducing bondholders’ rights in the process. Even if bonds have been issued under UK or US law, this emphasis on the bankruptcy regime itself effectively dilutes or negates many of their protections.

Application to all bonds by statute: Cyprus again demonstrates that, when backed into a corner, the authorities are willing to impose losses by statute on all bonds, even at senior level. This contrasts with the previous official EU line of more or less waiting until 2018 to issue new, bail-inable senior bonds, with their bail-inability set in contract rather than established by statute.

Extremely low recoveries: the decision to move bonds to the bad bank, together with uninsured depositors and equity, is likely to result in extremely large losses. Even if bonds are not actually converted outright into equity, as seems possible, the decision to protect not only insured deposits but also €9bn in ELA (both of which are going to what is effectively the good bank) is likely to result in near-zero recoveries.

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