Bail In The Banks – Or Break Up The Euro Zone?

Slovak finance minister,Ivan Miklos, seems to be one of the few EU leaders who is able to face the harsh reality of the European Monetary Union. The risk of a euro zone break-up is very real, he told reporters before the weekend – unless EU bail in the banks and make them share the financial burden of the sovereign debt problems. The Slovak government now considers the euro zone as a hostage of the financial markets.

“If we continue this way, we are close to a pyramid scheme.”

Iveta Radicova

The financial messed up euro zone risk breaking up, unless EU force the banks to eventually share the cost of the crisis with the taxpayers, Slovakia‘s finance minister Ivan Miklos says. The Slovak finance government consider the Greek bailout an “essentially a mistake” that made precedence and eventually to the European governments being hostages of the financial markets.

I belive this is the best summary of the European sovereign crises I’ve heard, so far.

However, not that surprising as Slovakia was the only euro area member who refused to participate in the Greek bailout.

If only the executives club in Brussels could start listening more to the folks in the so-called peripheral parts of their kingdom…

Ivan Miklosš

“Even during current conditions that are very tough, very complicated, and when the risk of the euro zone break-up – or at least of its very problematic functioning – is very real, despite all that, Estonia will become a new member in January,” finance minister Miklos said earlier this week, speaking to university students in the Czech capital, Prague.

Ever since the Slovakian center-right government came to power in July this year, they’ve been calling for banks and private investors to pay their share of the clean-up bill, valid for all rescue operations under the euro zone umbrella.

The Slovakian government considers the Greek bailout an “essentially a mistake” and a “precedent” that made European governments a “hostage” of financial markets.

(A scenario the econotwist’s first described last winter: Why Should EU Bail Out Greece?)

Iveta Radicova

“If we continue this way, we are close to a pyramid scheme,” the Slovak prime minister Iveta Radicova, told journalists after a meeting, Wednesday, warning that a system of accumulating debts eventually risked falling like “a house made of cards”.

“Once again, taxpayers are expected to pay the bill. Once again, the banks are being rescued,” Ms. Radicova says, hinting that Lisbon and Madrid could be next euro-buddys going hand in hand to the EU social services in Brussels.

“I cannot rule out that we will be soon discussing other countries. And I must point out that Portugal and Spain form communicating vessels,” she says..

And Euro zone experts are indeed busy discussing details of a future, permanent EU crisis instrument – a successor to the €750 billion backstop mechanism (known as the European Financial Stability Fund, EFSF) set to expire in mid-2013.

Me, too!

Germany and Finland put forward proposals on how to pull bondholders into a rescue operation of the current scale, with both floating the idea of a “collective action clause“.

According to media reports, governments in crisis will first adopt tough austerity programmes, and then at a later stage restructure their debt in agreement with the majority of creditors.

This could take form of extending the original repayment period, reducing interest payments or a write-down. Governments would not negotiate with each investor individually, however, but a majority of creditors would set the terms of the restructuring, the EUobserver reports.

“The only reason for them [financial institutions] to change behaviour is to include them in the responsibility chain in case of financial trouble,” the Slovak PM Iveta Radicova argue.

Related by The Swapper:

• The European Community Is Disintegrating
• Warns Against Euro Zone “Elite”
• Brussels Tells Athens To Shut Up And Take The Pain
• Bundesbank: Ireland Will Destroy The Euro Zone
• EU Member States Disagree On Debt Figures
• EU’s Bank Rescue Turning Into Political And Economic Catastrophe
• EU Leaders Trigger Another Market Panic
• From Greece With Anger
• Greece About To Enter The Death Spiral
• A European Revolution by December?