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Italian bank bailouts allowed despite EU rules because governments know you can only inflict a bail-in one time

Italian bank bailouts allowed despite EU rules because governments know you can only inflict a bail-in one time

Rules introduced by the EU last year forbid taxpayer money being used to rescue lenders without investors also taking a hit.

But investors are to be protected under the deal pulled together by Rome and approved by the European Commission. –¬†Express

Over the past two weeks, the Italian government was given permission by the ECB to bailout three banks despite the fact that current rules within the European Union prohibit the use of taxpayer funds to recapitalize insolvent banks.  And in fact just recently as well, a Spanish bank was forced to conduct a bondholder bail-in in order to receive loans from the ECB for the bank that took over Banco Popular.

So the question that must be asked is, why did the ECB allow and in all actuality help facilitate sovereign and central bank bailouts against the rules imposed by the European Commission?  The answer might lie in the understanding that nations and central banks will only be able to do a depositor bail-in once, because after that no consumer will ever trust the banking system again.

The Italian state has stepped in with funding to save yet another failing bank, meaning taxpayers now stand responsible for over 22 billion euros ($25.4 billion) of bailout money recently extended to the sector.

Finance Minister Pier Carlo Padoan announced late Tuesday that the government had received approval from the European Commission to pump 5.4 billion euros into¬†Banca Monte dei Paschi di Siena (BMPS)¬†in exchange for the lender undertaking a major restructuring overhaul. –¬†CNBC

Additionally, the ECB has long been¬†tied to the German central bank and government, and in many ways their policies have been predicted on a winning outcome for the coalition’s largest economy. ¬†And in both instances of Spain and Italy, a default on their bonds would have been critical to Germany since their banks own most of that debt.

Finally there may have been another factor which prompted the ECB to go ahead and allow Italy to perform a bailout of their banks, and that is because the Italian parliament in recent days has been seriously looking at dissolving itself from the Euro currency, which would cause even greater problems to the financial system on the continent.

The first recognized bail-in took place on the island of Cyprus, but its true intention was a geo-political move by the West to try to rid Europe of Russia’s offshore banking haven. ¬†Thus the consequences of this bail-in were felt more ideologically around the world rather than monetarily to the average depositor. ¬†But make no mistake, the next real banking crisis will involve confiscation of depositor assets through the mechanism of a bail-in, and once that happens very few will ever trust their money to a financial institution ever again.

Kenneth Schortgen Jr is a writer for The Daily Economist, Secretsofthefed.com, Roguemoney.net, and Viral Liberty, and hosts the popular youtube podcast on Mondays, Wednesdays and Fridays. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.


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