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Bail-in Bonds

 
 


Bail-in bonds, the term is now an idiosyncratic dilemma in Italy.
 

But, retail investors, who hold bonds sold by the country's lenders, are feeling the heat as a government aid to rescue local lenders is directly related to them.

 

1. What is bail-in?


It is the opposite of a bail-out, which involves a scheme of rescuing a bank or financial insti tution by the govern ment using taxpayer money. A bail-in rescues a financial institution by mak ing its creditors and de positors take a loss on their holdings.

2. What is happening in Italy?


Banks are bleeding with bad loans as borrowers are increasingly failing to repay them. Brexit has worsened the scene with ripple impact. The government is expected to rescue them from ut ter collapse, a normal practice world-wide. But, a state aid is subject to a condition. Such sav ing scheme requires losses for riskier or "subordinated" bank bond investors before government funds are deployed.

A bank's creditors need to chalk up 8% of the bank's outstanding lia bilities, a prerequisite required to use taxpay er's money .

3. Who holds such bank bonds?

Many of them are retail customers like you and me in India.

An IMF report suggests, they own about a third of the 600 billion of bank bonds in Italy. Retail people also own half of an estimated 60 billion of subordinated bank bonds, Financial Times reported.`

4. What is IMF's assessment of it?


IMF directors considered that effective use of the framework for the prompt resolution of banks is important.Recognising the adoption of the Bank Recovery and Resolution Directive (BRRD) framework, they noted that concerns related to the bail-in of retail investors should be dealt with appropriately . Bank balance sheets are strained by very high NPAs and lengthy judicial processes; and public debt has edged up to close to 133% of GDP , a level that limits the fiscal space to respond to shocks.

5. Does it have political colour?


Yes. The local government looks to support its banks with taxpayer money while protecting retail bond holders is also essential. An elected government cannot afford to ignore people on the street.

6. Is there any way out?
An exception to the state aid rule may be invoked. This means, some bail-in measures can be done away with at the cost of risking financial stability.

7. What European rules say?


European Union, of which Italy is an integral part, rules allow state aid to banks only in exceptional circumstances. But, Italian PM Matteo Renzi has said a deal with the European Commission to allow public support for its weakest lenders was "absolutely within reach".

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