It is nice to have the power to never have to pay for your errors. To get that kind of clout, you have to have a credible threat to make the rest of the world miserable if you are inconvenienced.
FLOYD NORRIS
Notions on high and low finance.
Financial markets have that power, as we learned in 2008. The decision to allow Lehman Brothers to fail stunned Wall Street, and a credit crisis took down the world economy. In the aftermath, lenders to other banks, even those that failed, were not forced to suffer losses.
The decision to allow Lehman to fail seems to have had at least some ideological component. It isn’t capitalism if you can’t fail. But practicality prevailed thereafter.
This year, the decision to force private lenders to take 50 percent haircuts on loans to Greece was promptly followed by plunging prices on Spanish and Italian bonds. It was Angela Merkel, the German chancellor, who led the charge for making the banks pay, for similar reasons to the ones heard when Lehman went down. Now Europe is contemplating huge capital shortfalls for its banks, and Ms. Merkel has backed down. Bloomberg reports:
"As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the I.M.F. principles and doctrines," EU President Herman Van Rompuy told reporters at a briefing. "Or, to put it more bluntly, our first approach to P.S.I., which had a very negative effect on debt markets, is now officially over."
The I.M.F. — the International Monetary Fund — tells me that those policies and doctrines provide for no automatic losses for the private sector, but do not rule them out either. Instead, there is to be a case-by-case analysis. William Murray, the I.M.F. spokesman, says this 2010 program for Jamaica is the most recent one, other than Greece, where private lenders did take haircuts.
So you could say that there really is no promise to spare the banks. But I suspect the reality is that the recent experience has traumatized Europe enough that it will be a very long time before anyone suggests that banks should suffer for foolish lending to a member of the European Union.
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