In an attempt to improve confidence, yet another hare-brained scheme was launched by France to spare bondholders any losses.

Please consider Euro zone may drop bondholder losses from ESM bailout

Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.

Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) – the permanent facility scheduled to start operating from July 2013 – could be withdrawn, with the majority of euro zone states now opposed to them.

The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

“France, Italy, Spain and all the peripherals” are in favor of removing the clauses, one EU official told Reuters. “Against it are Germany, Finland and the Netherlands.” Austria is also opposed, another source said.

Germany and some other member states were hoping to bring the ESM, which will have a lending capacity of 500 billion euros, into force as early as July next year, but disagreement over its structure could delay that.

That’s right folks, we are going to bail out the banks and no one has to take any losses (except taxpayers of course who will “share” 100% of the risk). Otherwise there will be a “loss of confidence” in the same banks that plowed into Greek, Spanish, Irish, and Portuguese debt because supposedly there would be no losses on sovereign debt.

Now they have taken a no-loss idea that has already blown sky high, and want to expand it to the next level: “no losses on bailouts”.

This plan is so stupid only government bureaucrats could dream it up.

The only true way to restore confidence is to punish banks that make stupid lending decisions. Thus, 100% of the losses should go to the bondholders, not zero percent.


Reader Jim writes …

A buddy of mine tells a story about being in the Army. Each time they asked their commanding officer why they had to do the latest unpleasant assignment, he would reply “It builds character.” One day a lonely voice in the back said “Sir, we have enough character already.”

In that spirit let me inform the politicians “I have enough confidence already.”

Mike “Mish” Shedlock
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