by Michael J. Kosares
December 2013
A European Union plan to curtail bailouts will put bank stock and bond holders at risk in the event of a failure as well as large corporate and private depositors with accounts over 100,000 euros. These bail-in measures, approved Wednesday by Europe's finance ministers, are sure to change the way investors look at banks both from an investment point of view and in the way they are operated and governed. Though the European Parliament and individual EU governments must approve the deal, the plan should serve as warning on both sides of the Atlantic as to how policy-makers in governments and central banks now view responsibility for bailing out poorly run and failing banks.
One positive that could come out of the plan, if implemented, would be stricter governance and the imposition of market discipline opposite the "moral hazard" that goes along with taxpayer and central bank bailouts. Investors likely will want to know more about the risks generated by global proprietary trading units before buying a bank's bonds. Banks in turn will need to be more forthcoming about the nature of their trading risks or expose themselves to the possibility of lawsuits.
As a result, even in advance of the plan passing Parliament, there could be a sell-off in bank stocks and bonds particularly among banks teetering on the edge of passing stress tests. As a result, the plan could prematurely generate the very problems with which it is designed to cope.
Some American policy-makers and regulators have taken a similar tack with respect to American banks and some Fed governors have publicly backed similar bail-in measures. (See Fed Governor Jeremy Stein speech at International Monetary Fund Conference, April 17, 2013) It is probably only a matter of time until a similar 'bail-in' plan makes headlines on this side of the Atlantic.
Quiet, strong European gold coin and bar demand
Over the past few months, we have heard through our market connections that very strong gold demand is building quietly, behind-the-scenes in Europe. The Krugerrand gold coin, a European favorite, is now selling for higher premiums than normal, an indication of tight supply, and our sources report supply issues with bullion related pre-1933 gold coins, another European favorite. Swiss refiners report gold bar shortages as Europe competes with China for the limited supply of gold in bar form. Much of the investor interest in Europe, we are told, is related to the crackdown on secret bank accounts in Switzerland, Lichtenstein, Luxembourg and other tax havens. There is also persistent and lingering concern about the health of the financial sector and the possibility of another black swan event within the EU. European history is generously endowed with more than its fair share of financial panics and economic breakdowns, and the long-term use of gold as a safe-haven has never lost its appeal in certain, well-capitalized quarters.
For this group, the lower pricing since the beginning of this year is a happy and useful co-incidence. These hedge-oriented investors probably would have purchased gold coins even if the price had stayed near all-time highs given the perceived risks in the banks -- risks that apparently will now be passed along to the banks' stock and bond holders as well as so-called "large" depositors. As such, the historic gold coin market -- and the gold market as a whole -- is likely to experience even stronger European demand in the weeks and months to come.
Related: EU set for more Cyprus-style bail-ins for troubled banks (CNBC, 12/11/2013)
