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German and Austrian Governments Move Ahead with Bail-In

July 16, 2014 (EIRNS)—The German cabinet approved on July 9 European Union plans to implement the banking union. The new legislation, designed to go into effect on Jan 1, 2015, i.e., one year earlier than required by the EU, introduces into existing rules the provisions of the EU’s Recovery and Resolution Act under which a special resolution authority will be given the direct power to bail in a bank’s shareholders and creditors in the event of resolution (insolvency).

The draft bill of the German Finance Ministry states the intention to create instruments to allow the winding-down of systemic institutions, in other words Deutsche Bank and Commerzbank, without jeopardizing financial stability. “This ensures that in times of crisis, above all owners and creditors will contribute to solving the crisis, and not taxpayers.“ That might sound good at first, until one realizes that creditors are simple depositors or businesses and individuals with a bank account—who also happen to be taxpayers.

The draft bill will be taken up by the Bundestag in September, so there is still time to stop it.

The Austrian government’s legislation goes even further, as it does not exempt from the bail-in the first [Euro]100,000 on accounts. On July 8, the conservative-socialist government in Vienna had its parliamentary groups pass special legislation for a bail-in of Hypo Alpe Adria bank (HAA), in the range of nearly [Euro]900 million. The victims are hundreds of thousands of Austrians who bought life insurance policies. Indeed, the insurance companies had invested in HAA bonds that will no longer be guaranteed under this legislation. Specifically, it hits the policies of civil servants (at Oesterreichische Beamten-Versicherung), of municipal workers and employees (Wiener Staedtische Versicherung) and others who bought insurance from Uniqua.

Previously, the Austrian province of Carinthia guaranteed the HAA, but the new legislation declares that guarantee to be invalid retroactively (!), which likewise invalidates the transfer of that guarantee to the Austrian state when the bank was nationalized in 2009.

The Austrian government claims the legislation only applies to the case of the HAA, but critics have correctly warned that a dangerous case of precedence has now been set, leaving the door wide open to other expropriations.