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 next year.
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 (18.5 billion pounds) of unsecured bonds since the start of last year. Nor has it prompted large savers to move their cash to safe havens.
Source: Reuters
