And that word is “haircut.”
Just about any time the word is used by politicians or regulators in the context of “Hey, maybe bondholders who loaned money to risky banks should take a haircut and not be bailed out at 100 cents on the dollar,” there’s usually selling a panic.
And that’s what we’re about to get says Ambrose Evans-Pritchard at the Telegraph:
The European Commission will on Thursday press ahead with plans to spread the burden of EU bank failures to senior bondholders, marking the start of harsher times for Europe’s creditors.
Michel Barnier, the single market commissioner, will publish a “consultation paper” outlining ways to shield taxpayers from banking crises. It is the first stage of what will almost certainly become a binding law.
We’re eager to read this paper, and obviously any speculation of it actually having a market impact is dicey.
But one thing we’ve noticed is that while politicians talk about haircuts applying in futures rescues, investors react as though the impact will happen right now, which is logical in an efficient markets sense, we suppose.
So, just be prepared for this to come out. It will be interesting.