* Germany wants rules in 2015 to push bank losses on
* EU lawmaker Hokmark warns big depositors can also be hit
* Tough regime could be in place for ECB bank shake-out
By John O'Donnell
BRUSSELS, Nov 13 Market euphoria and soaring
demand for European bank debt could be brought back down to
earth if the European Union pushes ahead with the early
introduction of rules allowing Cyprus-style raids on bank
creditors and big depositors
Following demands from Germany, the European Union law to
raid the bondholders and savers of failing banks could take
effect as soon as January 2015, three years earlier than planned
and in time to hit banks exposed by European Central Bank tests
An early start date has won support from the ECB, uneasy
over banks' reliance on its support, and this week Jens
Weidmann, the president of Germany's Bundesbank, became the
latest policy maker to join the chorus of support.
Investors have been buying up bank bonds to make up for
otherwise feeble investment returns in an era of record low
interest rates. The market mood has picked up so much that hedge
funds and others are even ready to invest in Greece, the country
at the deep end of the euro zone debt crisis.
The so-called 'bail-in' of creditors could, however, revive
the worst memories of the debt crisis and mark the currency
bloc's biggest upset since a rescue of Cyprus earlier this year
broke a taboo by imposing losses on big savers.
"Animal spirits are back," said Jacob Kirkegaard of
Washington think-tank the Peterson Institute For International
Economics. "But this market is not going to last. The situation
remains very, very fragile."
The prospect of the new law has done little to curb
enthusiasm for bank bonds; Spanish banks have sold 22 billion
euros ($29.5 billion) of unsecured bonds since the start of last
year. Nor has it prompted large savers to move their cash to
"The market may assume that there is not going to be
bail-in, that when the going gets tough, the governments and the
ECB will cave in," said Kirkegaard. "They will have a rude
The power to impose losses on bank creditors is the most
market-sensitive part of banking union. Germany wants its early
introduction in return for giving its full backing for the
project to police and support banks in the euro zone.
Berlin wants the rules available for next year's ECB health
checks, allowing losses on bondholders or large depositors of
banks with skeletons in their closet.
"I hope that serious investors know what they are investing
in," said Gunnar Hokmark, a member of the European Parliament
who plays a central role in shaping the new law.
"Everything is to be seen as bail-in-able. Depositors are,
in the end, bail-in-able. If anyone would be surprised by that,
they have been away from the debate for quite a long time."
Originally pencilled in for 2018, these rules will be
finalised and possibly accelerated by European Union countries
and the bloc's parliament in the coming weeks.
There is a lot at stake. Banks across the 17 countries in
the euro zone have 860 billion euros of unsecured bonds, with
German banks accounting for almost 200 billion euros, according
to Thomson Reuters data.
Banks in Spain and Ireland are selling billions of euros of
bonds - Irish banks have issued almost 750 million euros of
bonds over roughly the past year - despite uncertainty over
their true health.
Investor enthusiasm has not been dimmed by memories of the
banking problems that forced both countries to ask for
international emergency aid.
These investors would be among the first in line for losses,
if problems are uncovered. And yet, the cost to banks of selling
such debt is dropping to levels not seen since 2010.
"If you look at the pricing of bank risk across the euro
area, that market is sniffing glue," said Willem Buiter, Citi's
The price for banks of a credit default swap - a form of
insurance to cover non-payment of debt - is roughly one third
the level it was at the peak of the crisis in 2011.
It is not only bondholders at risk. Savers with more than
100,000 euros at a bank that is closed or revamped also stand to
lose out, but depositors, too, appear so sanguine that they
haven't troubled to move their money to safe havens such as
The volume of deposits in countries such as Greece are
holding steady, according to ECB data, just months after capital
controls were introduced in neighbouring Cyprus.
Savers in Slovenia, where the government is required to help
banks weakened by years of reckless lending, are equally calm.
After modest falls in deposits after Cyprus, the volume is now
Yet ratings agency Fitch estimates the cost of rescuing
Slovenia's banks at 4.6 billion euros - probably too much for
the country to manage alone, without a bailout or other radical
"Deposits in countries such as Greece or Slovenia are
irrationally sticky," said Citi's Buiter. "Many euro area
governments have empty pockets or are politically unable to help
their banks further without bank creditor bail-in."
The size of banks' potential liabilities have long overtaken
government's ability to save them.
ECB data shows that euro zone banks have issued more than
3.8 trillion euros of home loans - more than a third of the
bloc's output and one-and-a-half times the German economy.
This helps explain why Germany, the euro zone's biggest
economy and the country most likely to be called on to bear the
brunt of bank clean-up costs, wants the tough rules early.
Last week, the ECB came out in favour of an earlier
introduction of bail-in, playing down concerns that this would
exacerbate banks' funding difficulties. Moving forward the date,
it said, would provide investors with certainty.
"Markets are complacent and believe the European crisis is
over," said Garry Schinasi, a former official with the
International Monetary Fund who now advises governments.
"But the banking system is still fragile in Europe. No one
really knows how bad it is."