By James Saft
(Reuters) – After years of insulating risk-takers from the consequences of their decisions, maybe it’s finally time to try something else.
Europe’s current crisis, and specifically the death spiral some of its banks and peripheral sovereigns are locked into, may provide just such an opportunity. It may now be time to cross that red line and force some bank bondholders, even senior bondholders, to take losses.
Throughout the now five-year-old global financial crisis, writing down bank debt when banks are insolvent is a step that policy-makers have been almost universally unwilling to take.
Fearing a rolling line of bank failures if the weak were allowed to go down, policy-makers have generally followed the following three-point script:
First, make abundant liquidity available to banks, ensuring that they don’t fall over in a panic. The European Central Bank’s unlimited LTRO is the logical extension of this.