Signs of Eurozone Bail-ins on the way, with timeline unknown

davefairtex
By davefairtex on Wed, Jun 18, 2014 - 2:04am

An indicator I developed a while back is starting to present a pretty clear picture of what life holds for bank liabilities in the eurozone.

When things go bad in a bank, when assets drop below liabilities, you can either increase assets (a bank bail-out by taxpayers injecting cash), or you can decrease liabilities - assuming you don't want all those bankers to actually lose their jobs in the unpleasantness of bankruptcy that would occur in real capitalism.

We tried the first way in 2008-2009, and that turned out to be expensive and unpopular - at least with the taxpayers.  Rumor has it the bankers liked it.  This time around, we're going to try the second path.  Besides all the chatter online, what evidence do I have of this?

I'm following the money.  The front-line victims of the bail-in policy are the bank bondholders.  Here's a chart of "total bank bonds" divided by "total bank deposits."  This isn't a price chart - this reflects the total amount of outstanding bank bonds in euros divided by total deposits.  It has been steadily dropping since 2008, but the drop became much steeper after the bail-in regime appeared.  The red line was the chart of the google search "bail-in" from google.com/trends. (try it, its fun!)

My conclusion: eurozone banks are having a difficult time selling bonds after the bail-in regime became policy.  Even if its not a sure thing, potential buyers of bank bonds seem to be voting with their money.

And the next people in line after bondholders?  That would be uninsured depositors.  I hope that's not you.  I can't tell you when the balloon will go up, just that it most likely will.  Just follow the money.

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