More bank bailouts at taxpayers’ expenses

The Executive Board of ECB, (from right to left, around the table), Jörg Asmussen, Mario Draghi President, Peter Praet, Benoît Cœuré, Vítor Constâncio Vice-President, Yves Mersch. (ECB photo library).

Yesterday the European Sting wrote that the Vítor Constâncio, Vice-President of the European Central Bank was asking for more taxpayers’ money to support careless “systemic” banks in case they fail. Possibly he could have longed to deny this “accusation”. To this effect he will get the floor here below to defend himself.

In a speech delivered on Wednesday in Frankfort, Constâncio, came very strongly in favour of the creation of a new financial tool called, “Single Resolution Mechanism”, which is planned to offer more support to bankers. As if the already existing mechanisms, the ESM/EFSF, with a dowry of €700 billion ware not enough.

The vice president of the ECB insisted however that this new mechanism will not weigh again on taxpayers’ pockets but rather argued that, “Resolution is not about bailing-out banks it is about bailing-in shareholders and creditors”. Also he explained that this is about banks which “have attained the point of non-viability”. Then he added that “Resolution activity may require the temporary use of public money, if the Resolution Fund would not have enough resources, for instance, to capitalize a bridge bank that will be sold later on to the private sector thus recovering the capital involved”.

Obviously he means that the no bank will be left to rot. Every one of them will be saved and its depositors will have full state guarantee for their money. What else could a scrupulous banker ask for? Free state guarantees for his creditors/depositors, free hand to do whatever he likes with their money and also a free cushion for his entire edifice.

In any case it is not us who say that. Reality came to back these views.

Reality against Constâncio

Unfortunately for Constâncio 24 hours after he spoke in Frankfort, reality came against him. Yesterday the Dutch government was forced to use billions of taxpayers’ money to save the bank and insurance group SNS Reaal NV, from a complete dissolution. The bank had been spinning in risky bets all over the world its depositors’ / creditors’ money, a round sum of €30 billion. Why SNS Reaal NV did that? Simply because the rules allowed it.

This is exactly what happened with banks over the last ten years, after they were freed from the old prudence rules. They started spinning around other people’s money. If the bets were wan they were pocketed as profits for shareholders and bonuses for the management. If the bets turn sour, the government is called in to use taxpayers’ money to bailout the careless bank. All that because the banks hold hostages millions of depositors, that governments cannot afford to let them loose their life savings. This is the key for a bank to be classified as “systemic”, having thousands of depositors

Long live Iceland

Only the government of Iceland did not give in to banks’ black mail and let them rot. Fortunately Iceland won this week its case in the Court of the European Free Trade Association (EFTA) against Holland and Britain. The two countries rushed to compensate in full their citizens who had lost their deposits in the dissolved Icelandic banks. The Hague and London then turned against Reykjavik to pay the bill, a demand that was refused by the people of Iceland in two referendums.

In detail the EFTA Court ruling on Icesave (foreign citizens’ deposits in the failed Landsbanki of Iceland) rejected all claims that Iceland should be declared in breach of the European Economic Area Agreement. The Court rejected the claim that Iceland has breached the EU Deposit Guarantee Directive or has discriminated against depositors contrary to European Economic Area law. It must be noted that there is no appeal to this decision. It is a considerable satisfaction that Iceland won the day in the Icesave case; the EFTA Court ruling brings to a close an important stage in a long saga.

Iceland has from the start maintained that there is legal uncertainty as to whether a state is responsible for ensuring payments of minimum guarantees to depositors using its own funds and has stressed the importance of having this issue clarified in court. There was, however, no realistic possibility of such clarification until the EFTA Surveillance Authority decided to refer the case to the EFTA Court.

Still Constâncio insists that European taxpayers should pay for the creation of more mechanisms to support banks, when they fail under the weight of their own greed. Unfortunately all the Western countries, at the brilliant exemption of the people of Iceland, continue to this day to bailout private banks or nationalise them.

In this case nationalisation is a big favour to banks’ shareholders and management because it is a free guarantee to creditors. Bank deposits are actually loans to banks.

In short western governments reassure their citizens that their deposits to any imprudent bank do not run any danger and will be paid in full by taxpayers’ money, if the bank fails. Mr Constâncio, isn’t this a free government guarantee and a free hand to banks to do whatever they like with our money? Do you still insist after all that on the need for this Single Resolution Mechanism?