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Forex Flash: Is the ESM still the most efficient mechanism for recapitalization – UBS

FXstreet.com (Barcelona) - Many commentators have called the Eurozone authorities' Cyprus exercise a case study in 'how not to conduct a bailout'. Small wonder then that Eurogroup Chair Dijsselbloom on Monday said the Cyprus bank restructuring plan 'should be a template for the rest of Eurozone'.

Although he backtracked significantly late into the Monday session, a lot of the damage had been done. If this is indeed the line of thinking that core Eurozone officials are now working on, rather than using the ESM as a direct recapitalization vehicle, it would mark a sharp change in thinking. According to Research Analyst Gareth Berry at UBS, “No private sector creditor in the capital structure, in particular senior bond holders, would be safe. With the new genie out of the bottle, it is important to look at the implications for the euro and whether the currency should start looking at cues from other markets for directionality.”

Holistically, this approach is euro-negative. Throughout Q1, foreign investors who had been looking to gently step back into the Eurozone once again were only comfortable in doing so because Draghi was committed to pricing out tail risk and dabbling in the most senior securities should also render the investors immune to restructuring plans for now, or at least until bail-ins in a fully-fledged resolution framework is in place, underpinned by legislation and the SSM.

European Parliament considers bailing-in large depositors

The euro dropped in the European afternoon on information from Reuters that the European Parliament would be inclined to bail-in big savers, who hold deposits of over 100,000 euros at distressed banks.
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