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The EU Introduces "OTC" Bailouts
October 13, 2013 • 11:09AM

Expecting a banking crisis in the short term, and not having a bail-in mechanism yet in place, the EU has now introduced the "OTC bailout" scheme, which consists of allowing governments to bail out banks off budget, on condition that bailed-out banks must also implement bail-in! This measure was announced in a letter to EU Finance Ministers by Commissioner Olli Rehn on Oct. 9 and is outrageous in several aspects. First, it introduces the permission to violate EU deficit rules for bailing out banks, while keeping those rules to prevent bailing out people; millions of citizens in EU member countries are suffering and dying because of those rules. Secondly, the justification adduced is that bank aid represents a "one-off" measure and thus, they can be excluded from deficit accounting. As if investments were not a one-off measure!

As LaRouchePAC has reported, ECB President Mario Draghi had welcomed the decision at the latest monthly ECB press conference. We have also reported that the new EU rule has already been implemented in the case of Monte dei Paschi di Siena (MPS), where Rehn demanded that government aid for MPS be conditioned to MPS implementing a "mini-bail-in," in a letter to Italian Finance Minister Saccomanni.

The Oct. 9 letter by Rehn has an additional perverse condition: Only countries which have a debt-to- GDP ratio below 60% will avoid an excessive deficit procedure. For indebted countries, there will be no procedure only if they keep the deficit under 3%. This means that in order to bail out banks and avoid a procedure, indebted countries must cut public expenses (health, school, pensions and security)!

In his letter, Rehn refers to the "revised state-aid guidelines, which were presented in the recent Banking Communication and entered into force on 1 August 2013. ... According to the revised guidelines, shareholders and junior bondholders would be required to fully contribute to building the capital base of a bank before public money could be injected.

"Under the Stability and Growth Pact, public capital injections are, in general terms, regarded as one-off or temporary measures and as relevant factors for financial stability, which means that they do not count against the Member state in the context of the excessive deficit procedure.

"In broad terms, the treatment of capital injections requiring recourse to public backstops can be summarized as follows....

"For a Member State in which the capital injection would lead to an apparent breach of the debt or deficit criterion of the Pact, financial stabilization operations in the above context would be taken into account as a relevant factor in the Commission's assessment of compliance with the criteria, and thus an excessive deficit procedure (EDP) would normally not be opened. Member States with debt above 60% of GDP however would be an exception and an excessive deficit procedure (EDP) would be opened, unless the amount of capital transfers is limited so that it allows them to keep the nominal deficit close to the 3% reference value. The EDP recommendation in such a case would consider that such operations are usually of a one-off nature....

"The revised state-aid guidelines clarify that bank share-owners and junior creditors would need to contribute before taxpayers' money is spent to foot the bill in the case of possible bank bail-outs. At the same time, it is clear from the above that the EU fiscal rules provide no disincentive to effective public backstops."


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