Photo: EPA

On Thursday night, European finance ministers finally agreed on general rules for the participation of bondholders and depositors in rescuing troubled banks. In the future, writing off part of the deposits, tested during the Cyprus crisis, will become commonplace throughout the European Union. At the same time, countries were able to bargain for the opportunity to deviate from the general rules, which, according to experts, will create uncertainty for investors and increase the cost of financing for banks.

Agreement on general rules for supporting banks on the verge of collapse was reached at an extraordinary meeting of EU finance ministers after seven hours of negotiations. These rules will become an important part of the European banking union, which the region's leaders began talking about last year. The negotiations, however, were complicated by contradictions between the two blocs of countries. Germany, Holland and Finland demanded strict uniform rules for all, while France and other southern European countries sought to take into account national specifics when providing bank bailouts. The ministerial talks that lasted almost 24 hours last weekend failed precisely because of these differences.

In the end, a compromise was reached only just before the start of the EU summit, scheduled for late Thursday evening. According to the agreements, before starting to receive external support, banks must use 8% of their own liabilities to save themselves. First of all, we are talking about the fact that banks will refuse to pay holders of their bonds. In addition, depositors holding more than 100 thousand euros in bank accounts, which are covered by the European deposit insurance system, may suffer. At the same time, deposits in excess of this amount opened by individuals and small and medium-sized businesses will be “haircutted” last - after funds are written off from the accounts of large corporations. Nevertheless, countries will be able to adjust the list of victims of such a “haircut”, depending on the characteristics of their national banking systems.

In the future, the authorities will be able to get involved in rescuing banks, either through budget funds or through special liquidation funds, which are expected to be created by 2018. Governments will accumulate funds in them in the amount of 1.3% of the volume of insured deposits in a particular country through a special levy on banks. However, as long as the financial institution does not fully use the funds of the holders of unsecured bonds, the authorities will not be able to spend more than 5% of the volume of its obligations to save it. The same condition must be met in order for the bank to receive support from the ESM stabilization fund, which last week was allowed to direct up to 60 billion euros of the 500 billion euros available to it to help financial institutions. Infusions from the authorities will also require approval from the European Commission.

“For the first time, we have agreed on the participation of bondholders and depositors in bank rescues to protect taxpayers, break the vicious link between banks and states and force banks to behave more responsibly,” said the chairman of the Eurogroup, Dutch Finance Minister Jeroen Dijsselbloem. Since 2008, 1.6 trillion euros have been spent to support European banks, notes The Financial Times.

The new rules “may affect German investors as well as any other investor in the world,” said German Finance Minister Wolfgang Schäuble. However, the text of the agreement, which is expected to be agreed upon with the European Parliament by the end of the year, leaves the authorities the opportunity to nationalize banks further if their collapse threatens financial stability.

“Thanks to the new rules, the authorities have reduced the risk of ruining themselves by trying to save an unviable banking sector, as they did in Ireland. Instead, the model was taken as a model for involving bond and deposit holders in the rescue of banks, tested in Cyprus in March,” explained Berenberg Bank economist Christian Schulz.

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The economic crisis began in Ireland in 2007 with the collapse of the property bubble. The country's banks, which financed construction projects with short-term loans, were no longer able to repay the loans. The bankruptcy of Lehman Brothers in September 2008 further increased pressure on financial institutions and forced the government to introduce unlimited deposit guarantees, which were extended for the next three years. As a result, by the end of 2010, 64 billion euros were spent on supporting banks - about 40% of the country's GDP. Against the backdrop of the recession that began back in 2007 and rising rates on government bonds, the country's authorities were forced to turn to European partners and the IMF for help. At the end of 2010, they provided it with $67.5 billion, at least a third of which went to recapitalize banks, the number of which had by that time decreased from five to two.

In the case of Cyprus, which became the fifth country to request help from European partners due to economic problems, the situation developed differently. The international troika of creditors (European Commission, ECB and IMF) agreed to allocate only 10 billion euros to the country, provided that it would find another 5.8 billion euros itself. Due to the lack of any other sources of funds, the Cypriot government carried out a “haircut” of deposits over 100 thousand euros. Depositors of the liquidated Laiki Bank lost all their money, while account holders at the Bank of Cyprus lost about 40% of their savings. The Supreme Court of Cyprus subsequently recognized the authorities' decision to write off money from deposits as legal. The restructuring of the banking sector, however, led to a deepening of the recession in the republic: if earlier the European Commission and the ECB expected a decline in GDP of 3.5% this year and 1.3% next year, now they predict an economic contraction of 8.7 and 3 .4% respectively.

Experts fear that the final version of the pan-European rules turned out to be too vague. “In our view, the agreement reached at the meeting gives national authorities wide leeway to deviate from EU-wide rules, which creates dangerous uncertainty for investors in bank bonds,” Commerzbank economists Jörg Cramer and Christoph Weil said in their report. The risks of losses on banks' obligations may increase their cost of raising financing, agrees Christian Schulz.

Europe will be equalized to Cyprus