EU bank bailout roulette awaits Monte dei Paschi investors

Sun Sep 29, 2013 1:12pm EDT
 
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By Laura Noonan

LONDON (Reuters) - Investors awaiting the finer points of Monte dei Paschi's restructuring plan could soon find themselves wishing their bank had run aground at another time and place in the euro zone financial crisis.

After approving more than 5 trillion euros of state aid to its financial system over the past five years, the European Union has switched the burden of bank bailouts away from taxpayers and onto shareholders, bondholders and big depositors.

But a consistent approach and certainty over who pays when a bank gets into trouble is still lacking, deterring much-needed investment into the region and its lenders and ensuring a steady stream of lawsuits when losses are imposed.

"We are trending in the direction of a proper priority of claim, a proper following of the hierarchy of the capital structure," said Aaron Elliott, a London-based credit analyst at Citi. "But we are certainly not there yet."

"It's very difficult for investors to get involved," he added, pointing to a reluctance to buy bank debt in some countries.

European rules designed to ensure a harmonized approach to bank bail-ins, forged over the summer, do not take effect until 2018, leaving bank investors in heavily indebted countries in limbo and weighing on those states' own cost of borrowing.

"The reality is, these individual countries can't wait for 2018 to bail in bondholders, they just can't afford to do that," said Elliott.

In response to public outrage over taxpayer-funded bailouts and to reassure small depositors their funds were safe, the European Commission, which sets conditions banks must fulfill to qualify for state aid, in July updated its framework for bank bailouts for the seventh time in the crisis.   Continued...

 
The main entrance to Monte Dei Paschi bank headquarters is pictured in Siena January 25, 2013. REUTERS/Stefano Rellandini