The Italian government is considering bailing out the banks in defiance of EU rules concerning “bail-ins.” These rules require that a bank’s creditors, especially bondholders, “take haircuts” before taxpayer funds can be used to “recapitalize” the banks. The Italian government is reluctant to follow these rules because almost half of the banks’ junior, or subordinated, bonds, about 31 billion euros worth, have been sold on the retail market to households and individuals rather than to professional investors. In the case of insolvency, the holders of junior bonds are the last of the bank’s creditors to be paid. In its appeal to the EU to suspend its bail-in rules, the Italian government is portraying the retail purchasers of these bonds as small and naive savers. But this does not ring true. In 2015 the Italian government rescued four small banks. In compliance with EU rules it put the burden of the rescue on bank creditors rather than taxpayers. As a result, 12,500 “small savers” lost a total of 430 million euros on junior bonds. That is an average of 34,500 euros lost per bondholder.
Source: Italy on the Brink | Mises Wire