U.S. Markets open in 57 mins

The free market's "Utopia"

Pasquale Galassi

The deal will allow the European Central Bank to keep its emergency lifeline open to Cypriot banks on Monday, preventing a meltdown of the financial sector that threatened the country’s euro membership.

The plan does not need approval from the Cypriot parliament because the losses on large depositors will be achieved through a restructuring of the island’s two largest banks and not a tax. The parliament passed a new law governing bank failures just three days ago at Brussels’ urging.  

The new programme will see Laiki Bank, the country’s second-largest and most troubled financial institution, closed. Its 4.2bn Euro in deposits over Euro 100,000 will be placed in a “bad bank”, meaning they could be wiped out entirely.

Both junior and senior bondholders in Laiki will be wiped out, a first for a eurozone bailout country. The remaining smaller deposits at Laiki will be transferred to Bank of Cyprus, the nation’s largest lender, which in turn will be shrunk and completely restructured.  Deposits over Euro 100,0000 in Bank of Cyprus will be frozen and could see significant losses once the lender is restructured and recapitalised.

Unlike the original deal signed a week ago, only large deposits in Laiki and Bank of Cyprus will suffer losses. Combined, the two banks account for about half of all deposits in the country. Bank of Cyprus will also inherit the Euro 9bn that Laiki owes the eurosystem for the cheap central bank loans that have kept it on life support in recent months.

In the mean time in Spain:

the Spanish government will impose heavy losses on investors at nationalized banks and hire external advisers to help it manage these banks' assets. The bailout fund, known as the FROB, will impose losses of up to 61% at Spain's largest nationalized banks.
At Bankia, the largest of the institutions and the only one that is publicly traded, shareholders will be nearly wiped out and junior bondholders will lose around 30% of their original investment.

In keeping with EU requirements that investors bear losses before companies receive state aid, the nominal value of Bankia's shares will be reduced to €0.01 from €2 and the nominal value of its preferred shares and subordinated debt will be reduced to €4.841 billion ($6.29 billion) from €6.911 billion, the bailout fund said.

As you can conclude the new European path is to "impose" losses on banks' investors.

In my opinion it's absolutely fine to lose money in an investment: because you know that you are investing in something whose outcome is uncertain although at the time you put the money at work you got positive expectations. But what results can we expect when an external force such as the Troika impose a loss on banks' investors?

Investors lose the trust on the free-market, they acknowledge that the free-market is just an "Utopia".