Back to the Willem Buiter interview in Financiëele Dagblad. Here Buiter continues with some comments on Jeroen Dijsselbloem’s admission that bail-ins will be the preferred vehicle for conducting rescues going forward so as not to burden the public balance sheet.
This is an extremely important point because the difference between the bailout and the bail-in is that the bail-in recognizes that private debt is the problem and that these debts need to be recognized and written down rather than shifted to the public balance sheet. Bailouts are a form of loss socialization that shifts the burden of debts rather than reducing them. And for the euro zone, this is important because the eurozone state debtors are currency users that cannot rely on the ECB to monetize their debts if they run into trouble. They have no fiscal space whatsoever. As I have been saying for months, Germany is concerned about its own public finances. They know full well their own banks are going to need money too. The only way forward for insolvent banks really is a recognition of losses by private creditors and bank recapitalization.
Buiter says that even if Dijsselbloem had not said that Cyprus was a model for the future, it was clear this approach was going to be the way forward. “Even if he had not said it, it was clear that Cyprus was a laboratory.” Personally, I found Dijsselbloem’s intervention completely thoughtless because it’s clear policy makers haven’t decided on a comprehensive approach. Talking about future bail-ins in the wake of a contentious deposit grab can only make bank runs that much more likely. If you are going to recap these banks by bailing in creditors, you need to do so in a way that doesn’t create panic and contagion.
Part 2 of the interview is below for subscribers. Part 1 can be found here. Note, Buiter’s pessimistic view of capital controls in Cyprus at the end of this section and compare it to my comments when running through unilateral Cyprus exit scenarios last week. You can see that Cyprus already has a de facto national currency which will make their further existence in the euro zone untenable for more than a few months. If Cyprus does exit, it will be a model for others to follow.
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Buiter: ‘it was clear that Cyprus was a laboratory’ originally appeared on Credit Writedowns
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